John Edwards is at it again. Digging deeper in our pockets that is. His latest scheme for resuscitating Social Security, which was doing just fine when President Bush was talking about reforms, but which will be found to be on its death bed when he leaves office and a Democrat takes over, is to, you guessed it, raise taxes on the rich. This proves once again that there is no problem beyond the ability of a Democrat to fix with an appropriate tax increase.

Can we please define “rich” here? We all know that when the word “rich” is bandied about, whoever is doing the talking is not really talking about us. Who, except for a very few, actually consider themselves “rich”? It is a convenient term, because almost everyone thinks the person using the term is talking about someone else.

Currently, the government collects Social Security taxes on earnings up to $97,500 per year. If you make less, say $50,000 per year, someone making $97,000 a year might certainly seem rich to you. But if you make $50,000 and your spouse makes $50,000 does that make the both of you “rich”? It does to the IRS, who taxes your combined income.

I can tell you from personal experience that I make around that amount and I don’t feel “rich”. How many rich people do you know who drive 12 year old cars with 228,000 miles on them? It’s not that I don’t want a new car, but with six kids that I need to take care of and send to college, a new car simply isn’t high on my priority list. I know folks who make less that I do, with a brand new one sitting in their driveway. Are they “richer” than I, or do they simply have different priorities and different economic circumstances?

Mrs. Clinton won’t commit to exactly what she will do with Social Security, particularly the cap on earnings. She did mention to a voter in Iowa while campaigning there that she didn’t want to further burden the middle class and so was considering a “gap” whereby income from $97,500 to $200,000 would not be taxed, but everything above would be.

So evidently, Mrs. Clinton’s definition of “rich” is those who make over $200,000 per year. The voter wasn’t pleased however. He felt, as someone who makes less than $97,500, that he was paying an unfair share of the Social Security burden. Evidently his definition of “rich” is much less, or at least his definition of where the middle class begins is lower than $97K. At least in Iowa.

Which brings up another good point; where you live does make a difference. Fifty thousand dollars goes a lot farther in Iowa than it does in New York or LA (or, as a recent article pointed out, in the San Francisco Bay area.) Our tax structure really doesn’t take that into consideration. This may explain why there is such a vast disparity in what different people consider “rich” or “middle class”.

Mr. Edwards likewise is in favor of a “protective zone” from $97,500 up to “around” $200K. As usual, he began to go incoherent at that point.

“There are a lot of firefighter couples, for example, that make $100,000, $115,000 a year," Edwards said in the debate on MSNBC. "We don't want to raise taxes on them. But I do believe that people who make $50, $75, $100 million a year ought to be paying Social Security taxes on that income."

Hmmm. Well, I would be willing to bet that there aren’t really a lot of firefighter couples. Firefighting is a very physically demanding occupation after all. Not just anyone who wants to be one can do so. And while I know that female firefighters do exist, I would expect that the number actually married to other firefighters would make up a rather small percentage of the total universe of firefighters.

None the less, it is a good example because who can deny that firefighters aren’t working class folks, trying hard to make ends meet. Of course we don’t want to raise taxes on them! If it is a couple of white collar workers, junior programmers or middle managers say, knocking down a combined $100-$115K a year, are they considered rich? How about if they have a 401K?

I find it interesting that Mr. Edwards is all for grabbing Social Security taxes on those making $50, $75, or $100 million a year. Soak those rich fat cats! Only thing is, Mr. Edwards, the Social Security tax is a payroll tax. It is only levied on payroll income. That means if you get money from other sources, such as an annuity, selling stock, capital gains, etc, it is not subject to Social Security taxes. How many people do you really think get paid $50, $75, or $100 million a year in payroll income? Pretty darned few would be my guess. Most corporate folks who make that sort of money get most of it in stock or other remuneration. My guess would be that you might catch a few entertainers or sports figures with multi-million dollar payroll incomes, but that would be about all. And Oprah would be about the only one in the $50, $75, or $100 million a year range.

It makes me wonder if Mr. Edwards' planned expansion of the Social Security tax would expand it not only beyond $200K of payroll income (assuming he is being truthful concerning his proposed “gap”), but also expand it beyond payroll income and make it a percentage of all income.

The reason why Social Security tax is only on payroll income is because your employer pays a matching amount. The real tax is twice what you see on your pay slip, as those who are self employed (and pay both halves) can attest. If expanded beyond simple payroll taxes, the government could just make you liable for the percentage you normally pay, or they could go for the whole thing, the same way they do for self-employed folks. This would undoubtedly complicate the tax code even further, but since when has that bothered Congress?

I find it interesting that Mrs. Clinton recently floated a trial balloon regarding a “National 401K” that would be available to citizens, and which the Federal government would provide matching funds for. Great! Just what we need, yet another government savings program scheme. Let’s see, so far we have Traditional IRAs, Roth IRAs, educational Roths, 401Ks, 403Bs, Keoghs, and who knows how many others. Oh yes, and Social Security, of course.

Once again, in conjunction with this she mentioned “the middle class” and how this program of hers would help “tens of millions of middle-class families go from just getting by to getting ahead.” This time however, her definition of middle class was a bit different. Her proposal was for the government to contribute a dollar-for-dollar match annually up to the first $1000 saved to families earning up to $60,000 a year. If you make more than $60K you get 50 cent match on the dollar, up to a maximum of $500. If you make more than $100K, sorry, but you are “rich” and get nothing.

Oh yes. These are tax cuts, not actual cash payments. This means that if you don’t actually pay enough taxes to get the cut, you don’t really get anything. I assume that this would be a tax credit, but then again perhaps I shouldn’t make assumptions. And I am not sure what mechanism she is proposing to ensure that the money actually goes into this “national 401K”. Without a mechanism to ensure it goes there, it is just simply another income redistribution scheme, and you could take the money and go buy a new couch with it. Or spend it on booze.

Still it is instructive to note that Mrs. Clinton’s definition of “middle class” here seems to be less than $60K, with $60-$100K being “upper middle class”. So what is her definition of “poor”? Where does “middle class” really begin in her world?

Of course, she was in Iowa. Maybe she was listening to that irate voter.

And how does Mrs. Clinton propose that the princely sum of $1000 be invested? It is a 401K after all. Could she be thinking of that (gasp!), “risky scheme”, known as “the stock market”? At least it was a “risky scheme” when President Bush was proposing privatizing a miniscule 2% of Social Security.

Since she sees this forward-looking program of hers as being able to provide for the retirement security of “working families” (note: if you make more than $100K of combined income, you are by definition, not a “working family”), as well as for “major life investments” such as paying for a home or sending a child to college, it has to pay better than the 2-3% per year you would get in a savings account. In fact, it would have to do pretty well indeed, since the time horizons for the different events being discussed are very different. A new house, maybe 10 years out. Kids college, 18-28 years out. Retirement, 40-50 years out. This is assuming you start this when you are just starting out in the workforce.

And you won’t be contributing much to the fund, because, like the current Traditional IRA, once you get to the point where you can afford to max it out each year (and she didn’t say what the cap on it was, but you can bet there will be one), you find that you no longer qualify for it because now you make too much money. You are now “rich” and while you are still responsible for funding everyone else’s National IRA account, you are no longer a beneficiary of government largess.

The way you end up with a large pile of money at the end, while making small contributions up front is to 1) get a good rate of return, and 2) let it sit there for a long time. The only way to accomplish the first is in the market. And the only way to accomplish the second is to leave it alone. If you siphon some off for the house purchase (assuming you have that much in there by then), it takes a big chunk off the back end. And if you siphon still more off for the kids college education, by the time you get to retirement, there won’t be much there. Besides, we already have programs set up for the college part; educational Roth’s and 529 Plans to name two.

Of course, there is one thing about Hilary’s National IRA that I find very interesting that I haven’t seen mentioned anywhere. It could be a starting off point for eventually privatizing the Social Security program. Perhaps that is what she has in mind somewhere down the road, if elected. Then she can take credit for saving the program.

But didn’t Bush propose privatization? And wasn’t that deemed “too risky”? Yes, but Bush is a Republican. Hillary is a Democrat. Only Democrats can tinker with St Roosevelt’s masterpiece and get away with it. And sneaking up behind the issue, using a vehicle put in place by a Democrat may work better than a frontal assault on the sacred icon by a Republican.

Maybe. If this is the plan, and if she does a good job with it, it is something I could support. It is my belief that privatization is needed. Or “personalization”, as I heard it expressed by one politico recently. I don’t particularly care who gets the credit for it just as long as it happens.

Of course, if the real plan is to force me to pay for other people’s retirement programs on top of funding my own retirement, my kids education, and everything else under the sun, and then telling me “sorry, but you don’t ‘need’ the money we promised you so you don’t get it, then it will not get my support. If you were a betting person, what would you expect from a liberal administration?

But isn’t it interesting to watch the Dems weigh in on the woes of Social Security (which according to them has been doing just fine) now that it looks like it may finally be their turn at bat?