COMPARISON OF PAST AND CURRENT OASI TAXES

COMPARISON OF PAST AND CURRENT OASI TAXES

October 9, 2000

How much tax was paid in earlier years? How do we evaluate relative taxes when so much has changed? Wage growth has certainly taken place. Should any comparison be done on the basis of inflation or should it be based on the increased living standard?

This analysis attempts to compare earlier OASI taxes paid with today's workers. It assumes the average United States wage was earned in each year between 1937 and 1996. The designated OASI tax rate and OASI base for each year were also verified in order to make sure the correct tax was calculated each year. The OASI tax dollars were then adjusted by the change in the wage between each year and those of 1996. In simple terms the OASI tax paid in 1937 was multiplied by the change in the average wage in 1937 and that of 1996. Each succeeding year was done the same way.

The following four charts show a year by year analysis of the OASI tax. All dollars have been equalized to those of 1996. Keep in mind those who worked in year prior to 1983 paid most of their taxes in the last seven years. This is one of the major difference between Figure 3 and Figure 4.

From the stand point of wealth creation, the post ponement of the higher OASI tax is beneficial to earlier workers. It allowed greater take home pay during life's most important wealth creation period and allowed these savings to compound.

Figure 1 represents total life time taxes paid by each beginning years cohort to date. It gives a good idea of how much in taxes earlier cohorts paid relative to today's workers who have only contributed a few years. For example: a person who began work in 1937 paid $25,093 in taxes. Compare this to a person who began work in 1978, who has worked just 19 years, has paid $25,192.09 in taxes.

Figure 2 shows the total OASI tax paid by cohort. Those who began work in 1937 paid an equivalent of $26,348 while a person who begins work in 1996 is projected to pay $57,249 for an equivalent benefit. This does not take into account having to work two more years due to the increase in the retirement age from 65 to 67.

Figure 3 shows the yearly equalized OASI tax paid each year. As this chart shows, participants in earlier years paid a drastically lower tax. The participant in 1937 paid in $259.20 while those participants in 1996 paid in $1,363.07.

Figure 4 shows the equivalent average OASI tax paid by each cohort of workers. The participant in 1937 paid an average of $627.34 per year worked while the participant in 1996 paid in an average $1,363.07 per year worked.