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Cypen & Cypen
NEWSLETTER
for
OCTOBER 13, 2011

Stephen H. Cypen, Esq., Editor

1.      TRUTH ABOUT “FAT CATS” AND SOCIAL SECURITY: Of late there has been considerable discussion regarding failure of the “rich” to pay their fair share of income and payroll taxes (with rich being defined differently depending on who is doing the defining), writes Gary Findlay, Executive Director, Missouri State Employees’ Retirement System. Regarding the payroll tax for Social Security (the Old Age Survivors and Disability Insurance piece or 0ASD1), it is collected only on pay up to what is called the Social Security Wage Base.  For 2011 that amount is $106,800 of annual compensation. The current tax rate is 6.2% for both employees and employers.  (This year, as part of the economic stimulus package, the rate for employees is 4.2% but that is expected to be temporary.)  The other part of what is typically thought of as the Social Security tax is for Medicare.  The Medicare rate is 1.45% for both employees and employers.  The pay considered for Medicare is not capped at the Social Security wage base, and, since 1986, employees and employers who are not covered by Social Security also pay the Medicare tax.  (For pay above $456,662, the payroll tax collected for Medicare is actually greater than the payroll tax collected for OASDI given that there is no cap on wages subject to the Medicare tax.) The maximum OASDI tax, based on the 6.2% rate, is $6,621.60.  That amount would be the tax paid by an employee earning $106,800, as it would be the tax paid by an employee earning $1,000,000.  Effectively the million dollar earner is paying 0.662% of pay for OASDI, rather than the 6.2% rate paid by those earning the wage base amount or less:  evidence produced to establish the “fat cats win” scenario.  However, to see the complete picture, it is necessary to look at the benefit side of the equation. Social Security was initially, and continues to be, a financial safety net.  That is, it was never intended to be the total source of retirement income but rather was designed to allow the elderly masses to live at something above the poverty level.  The benefit formula, which is designed to favor those on the lower end of the pay spectrum, is necessarily complicated by that objective.  For the sake of clarity and big picture analysis, I will need to take a few liberties in describing how benefits are computed. Rather than the formula in a conventional defined benefit plan, which is usually a fixed percentage of final average salary times years of service, the Social Security Primary Insurance Amount (PIA) is computed by determining a participant's Average Indexed Monthly Earnings (AIME) and replacing various percentages of the AIME. First, what is the AIME?  As a practical matter, it is average earnings up to the Social Security wage base over the 35 years prior to reaching age 62, indexed for inflation.  For example, if a new employee is earning $50,000 a year currently and receives future pay increases at exactly the rate of inflation, that person’s AIME would be based on an annual salary that, in today's dollars, would be $50,000. Once the AIME is determined, the following benefit formula is applied.  Dollar amounts are adjusted prospectively for inflation and, for ease of understanding, are stated as annual amounts: 

90% of the first $8,988
32% of the next $45,216
15% of the amount over $54,204

Assuming that a person’s current pay is reasonably reflective of his career earnings adjusted for inflation, the PIA for various salary levels would look something like this: 

                                                     Wages
Salary                   PIA             Replaced

$25,000               $13,213               53%
$50,000               $21,213               42%
$75,000               $25,678               34%
$100,000             $29,428               29%
$500,000             $30,448               6%
$1,000,000         $30,448               3%

According to the Social Security Administration’s website, a person who earned the maximum-taxable earnings in each year since age 22 would have an AIME equal to $95,136 (annually) and a resulting annual PIA of $28,698.  This amount is less than the maximum amount shown in the table because historically there were times when the Social Security wage base was frozen for a number of years.  The table is intended to reflect what will happen for employees who are covered by the provisions where the formula and the wage base are automatically adjusted for inflation, as current law provides. Now back to the perceived fat cat inequity.  Presumably, if fat cats are going to be taxed on all of their earnings they would expect their benefits to be computed on the basis of those earnings and related contributions.  Because of the lengthy period used in computing the AIME, it would take many years before the benefits were based on actual total historical earnings, but, eventually, wage replacement at the million dollar pay level without the cap on covered compensation would be in the area of 16% rather than the 3% amount based on current law, with either being small relative to the 53% wage replacement at the low end of the pay scale. The policy questions to be resolved in this matter are fairly straightforward.  (1) Should a person who is earning a million dollars a year be paying $62,000 a year in Social Security contributions?  (2) If the answer to (1) is “yes,” should benefits be based on the pay on which he contributed?  It is almost a certainty that there will not be universal agreement on those issues.  The 94% of workers with income below the wage base would likely see it differently than the 6% earning more than the wage base.  Regardless of the outcome, there should not be any pretense about what is happening on both the contribution and benefit side of the equation.  It is my hope that this overview will help policymakers keep the big picture aspects in focus. A longer version of this article appeared in plansponsor.com. 

2.      FDNY WRITTEN EXAMINATIONS DISCRIMINATORY…:  A United States District Court Judge has found that from 1999 to 2007, the New York City Fire Department used written examinations with discriminatory effects and little relationship to the job of a firefighter to select more than 5,300 candidates for admission to the New York City Fire Academy.  These examinations unfairly excluded hundreds of qualified people of color from the opportunity to serve as New York City firefighters.  The court held that New York City’s reliance on these examinations constituted employment discrimination in violation of Title VII of the Civil Rights Act of 1964. Upon consideration of the parties’ submissions and oral argument, the court concluded that Plaintiffs had established a prima facie case that the City’s use of the two written examinations had resulted in a disparate impact upon black and Hispanic applicants for the position of entry-level firefighter. The court also concluded that the City had failed to present sufficient evidence supporting a business justification for its employment practices. Therefore, the court granted Plaintiffs’ Motions for Summary Judgment in their entirety. The court expressly distinguished the United States Supreme Court’s Supreme Court’s 2009 decision involving the City of New Haven (see C&C Newsletter for July 2, 2009, Item 1C&C Newsletter for November 19, 2009, Item 12 and C&C Newsletter for December 24, 2009, Item 7). There, the City of New Haven had set aside the results of a promotional examination, and the Supreme Court confronted the narrow issue of whether New Haven could defend a violation of Title VII’s disparate treatment provision by asserting that its challenged employment action was an attempt to comply with Title VII’s disparate impact provision.  The Supreme Court held that such a defense is available only when the employer can demonstrate a strong basis in evidence that, had it not taken the action, it would have been liable under the disparate-impact statute. In contrast, this case presented the entirely separate question of whether Plaintiffs had shown the use of exams that actually had a disparate impact upon black and Hispanic applicants for positions as entry-level firefighters.  United States of America vs. The City of New York, Case No. 07-cv-2067 (E.D.N.Y., July 22, 2009). 

3.      …AND COURT WILL IMPOSE A MONITOR:  As a result of the above order, the judge has announced his intention to appoint a Court Monitor. Tellingly, a table in the record shows that Los Angeles, with a black population of 11.2% and black firefighters of 14%, has a ratio of black representation of 1.25%. New York, on the other hand, with a black population of 26.6% and black firefighters of 2.9%, has a ratio of black representation of 0.11%. There is one Clintonesque part of the order, in which the court quotes testimony from Mayor Bloomberg’s deposition testimony: 

Counsel for Plaintiffs: Do you consider yourself responsible for seeing that EEO laws and policies are followed? 

Bloomberg: You just asked that question.  I don't know what the word “responsibility” is and I can’t answer your question. 

Counsel: Well do you consider yourself responsible in any sense?

Bloomberg: I don’t know what the word “responsible” is, counsel. 

Folks, we’re talking about the Mayor of New York City here.   United States of America vs. The City of New York, Case No. 07-cv-2067 (E.D.N.Y., October 5, 2011). 

4.      AND THE SEC IS OUR WATCHDOG!: The Chief Financial Officer of the Securities and Exchange Commission requested the U.S. Government Accountability Office to render a decision under 31 U.S.C. §3529 regarding whether SEC had authority to enter into a multiple-year contract to lease real property, and, if the contract was proper, the amount SEC must obligate. GAO found that SEC had authority to enter into a multiple-year contract.  However, GAO also concluded that the SEC failed fully to record its obligation when it entered into a 10-year contract. The recording statute requires SEC to record an obligation for its total liability under the contract. Although SEC estimated that its total obligation would be at least $371.7 Million, SEC recorded an obligation for only $180,000. SEC had no authority to record an obligation for an amount less than its total liability under the contract. (What? It is only 1/2000th of the correct amount.) B-322160 (October 3, 2011) 

5.      PARAPROSDOKIAN: (A paraprosdokian is a figure of speech in which the latter part of a sentence or phrase is surprising or unexpected in a way that causes the reader or listener to reframe or reinterpret the first part. It is frequently used for humorous or dramatic effect.):    Where there's a will, I want to be in it. 

6.      QUOTE OF THE WEEK: “Men are not prisoners of fate, but only prisoners of their own minds.”  Franklin Delano Roosevelt

7.      ON THIS DAY IN HISTORY: In 1986, IOC announces baseball will become a medal sport in 1992. 

8.      KEEP THOSE CARDS AND LETTERS COMING: Several readers regularly supply us with suggestions or tips for newsletter items. Please feel free to send us or point us to matters you think would be of interest to our readers. Subject to editorial discretion, we may print them. Rest assured that we will not publish any names as referring sources. 

9.      PLEASE SHARE OUR NEWSLETTER: Our newsletter readership is not limited to the number of people who choose to enter a free subscription. Many pension board administrators provide hard copies in their meeting agenda. Other administrators forward the newsletter electronically to trustees. In any event, please tell those you feel may be interested that they can subscribe to their own free copy of the newsletter at http://www.cypen.com/subscribe.htm. Thank you. 

 

 

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Items in this Newsletter may be excerpts or summaries of original or secondary source material, and may have been reorganized for clarity and brevity. This Newsletter is general in nature and is not intended to provide specific legal or other advice.


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