Network News

X My Profile
View More Activity

Research Desk responds: Could raising the income cap save Social Security?

By Dylan Matthews

jpeg asks:

Back during the GWB years and the push to privatize Social Security, I did a bit of a thought experiment. What if Social Security was changed so companies no longer had to contribute their portion of Social Security, but Social Security was collected on all individual income with no cap? From what I found, it seemed like this would easily solve any "problem" with the funding of Social Security. Finding data for this was difficult and I wasn't sure of the veracity of some of the data so I kind of chalked it up to "too good to be true" and forgot about it.

Let's put jpeg's specific proposal to one side and first look at the general question of how raising the payroll tax cap could affect Social Security's finances. Currently, wages over a certain yearly total ($106,800 this year) are exempted from Social Security payroll taxes. Medicare's payroll tax has no such cap. This has raised the question of how raising the cap could extend Social Security's solvency. Janemarie Mulvey and Debra Whitman of the Congressional Research Service looked at this question in 2008 by evaluating three different proposals. The first would raise the cap so that 90 percent of wages are taxed (CRS estimates this would mean a cap of $171,600 in 2006) and pay higher benefits to those affected; the second would eliminate the cap and pay higher benefits; and the third would eliminate the cap for taxes but would not increase benefits. Here is how the proposals would affect the actuarial state of Social Security, as compared to its current trajectory:

actuarial_impact_of_social_security_cap_proposals.png

Alternately, here's how much of the Social Security shortfall is eliminated by each proposal:

shortfall_ss_graph.png

While all proposals put a dent in the shortfall, completely eliminating the cap without increasing benefits actually creates a long-term surplus, and eliminating the cap while increasing benefits comes close. The nature of Social Security as a social insurance, rather than welfare, program suggests that the latter proposal may be more palatable, as it retains the connection between what wage-earners pay into Social Security and what they get out of it.

Now, jpeg's proposal to eliminate the business-side tax would amount to slashing the Social Security tax in half. The CRS estimates that almost $100 billion in annual revenue would result from eliminating the cap, but that doesn't come close to half of the $654 billion (PDF) in revenue Social Security taxes brought in for 2009. To be sure, such a drastic cut could have a stimulative effect, and it's very possible that it would result in less than a 50 percent reduction in revenues, but it seems unlikely that the revenue loss would be smaller than $100 billion. Some cut in rates may be in order if the tax's cap is raised or eliminated, but one this drastic would probably go too far.

By Ezra Klein  |  June 28, 2010; 2:48 PM ET
 
Save & Share:  Send E-mail   Facebook   Twitter   Digg   Yahoo Buzz   Del.icio.us   StumbleUpon   Technorati   Google Buzz   Previous: Worrying about the wrong spending will keep us from doing the right spending
Next: Does income inequality cause financial crises?

Comments

What was/has been the policy rationale for limiting the amount of income taxable for social security?

Posted by: baxterbaxter | June 28, 2010 2:56 PM | Report abuse

It's primary value is that it allows libertarians and conservatives to pretend that regressive taxes on income for social security aren't "income taxes" when making the claim that the rich's "income taxes" are much too high.

See also sales taxes and various "fair tax" proposals.

It's all about creating a permanent economic underclass to serve an increasingly select group of increasingly wealthy individuals.

Posted by: lol-lol | June 28, 2010 3:31 PM | Report abuse

What if those born between 1980 and 2025 were required to pay into Social Security and Medicare, but received no benefits? This is combines several proposals and seems quite fair, as the savings from the PPACA will of course pay for all medical needs with enough of a bonus to pay for retirement as well.

Posted by: rmgregory | June 28, 2010 3:32 PM | Report abuse

There is no solvency problem! Stop perpetuating a falsehood! http://krugman.blogs.nytimes.com/2010/06/21/zombies-have-already-killed-the-deficit-commission/

Posted by: hihi22 | June 28, 2010 3:33 PM | Report abuse

How about eliminate caps, raise retirement age, limit benefits to 'as is' plus COLAs and a modest Soc. Sec. tax incrase for middle class?
Whaddaya bet its going to be a combination of ideas if anything is going to happen at all?

Posted by: ostrogoth | June 28, 2010 3:53 PM | Report abuse

Increase taxes on upper middle class people who work for a living? Who could object?

Posted by: tl_houston | June 28, 2010 3:54 PM | Report abuse

Thank you, Dylan. Very interesting stuff. I'm surprised that fully lifting the cap along with raised benefits almost covers the long term shortfall. One point, though, that I wasn't terribly clear on. Currently, Social Security is a payroll tax. What I was looking at was "all individual income". That would include, rental income, capital gains, etc. as well.

Posted by: jpeg | June 28, 2010 3:59 PM | Report abuse

I retired young based on the promise I would receive certain SS benefits when I became a certain age.

They better not raise retirement ages.

It would be fairer to eliminate the cap, the way it should have been done in the first place.

Posted by: Lomillialor | June 28, 2010 4:03 PM | Report abuse

jpeg - "What I was looking at was "all individual income". That would include, rental income, capital gains, etc. as well."
We already have that. It's called the Federal Income Tax. Why not just increase that, so the government will be able to pay off the debt it already owes to SS?

Posted by: tl_houston | June 28, 2010 4:19 PM | Report abuse

I wrote this well before this article, submitting it to my local paper in a very right-wing area; CA-50. The letters are limited to 200 words. Here it is :

Payoff the deficit just like that!

Conservatives hate entitlements, so let's work with them. Let's treat Social Security as what it is; an insurance policy to guarantee a minimal security. If you don't need it, you don't get it. Means testing of income, not assets. So, anyone who makes, say, $150K/yr from any other source, isn't qualified for or in need of SS. After all, we pay car insurance every year and hope we don't use it.

We should reverse the insurance premiums collections policy. Income below $20K/yr should be exempt, because low-income people benefit most quickly and directly from a tax cut. Income above the deductible(s) would be taxed. Presently, incomes above $105K are free of the tax. Tax all income all the way up. This will generate so much revenue that that actual tax rate could probably be lowered considerably.

These two fair and simple fixes would fix Social Security completely, and forever.

We need to keep the inheritance tax to promote a meritocracy rather than an aristocracy based on inherited wealth. The USA isn't about dynasties. I suggest that each person receiving an inheritance be exempt from the first FIVE MILLION DOLLARS. Notice we're not taxing the dead guy; we're taxing the recipients.

Posted by: senor_crews | June 28, 2010 4:20 PM | Report abuse

Baxter,
I am not a Social Security historian and I'm sure the reasons behind the cap are as varied as the stars, but I believe the chief argument for the cap was that they only wanted to pay out benefits in the sum that it was necessary to get by and not be giving out any more extra money to those who need it and the rich didn't want to pay any more money into it than what they would get back and the cap was the compromise.

hihi22,
Please notice how I put the word "problem" in quotes. It was meant to imply a hint of sarcasm. That said, though, it is a problem. Just a very long term one and not nearly as serious as Medicare. But just because something is long term doesn't mean you can't think about it now. Thus the thought experiment.

Ostrogoth,
Raising the retirement age is an easy fix, but how do you tell a blue collar worker who has spent 45 years of back breaking, repetitively straining work that he has to work years longer? I am generally against raising the retirement age for that reason.

Posted by: jpeg | June 28, 2010 4:22 PM | Report abuse

tl_houston,
There is a reason why Social Security and Federal Taxes are kept separate and never shall the twain meet. If you use Federal Taxes to pay Social Security, you open the door to pay Federal Budget items from Social Security. For a preview of what that would look like, look at any of the underfunded pensions held by states and publicly traded companies because they were used for other sources.

senor_crews,
I've always thought the estate tax should read something like this: You can give away all of your estate away tax free as long as you only give $1M to any individual. You can give more than that, but you will be taxed up the wazoo for doing so.

Posted by: jpeg | June 28, 2010 4:36 PM | Report abuse

The "business side" tax is paid by employers only in the literal sense that they hand over the money. But the money they are handing over to the government is every bit as much employee compensation as that paid out in wages. The government, abetted by employers, just siphons off wage-income before it ever reaches the workers.

Why don't we just means test social security, roll it into welfare and dispense with the idea that this a retirement benefit. Then we can do away with the age restriction and have a single welfare program open to people regardless of age.

Posted by: tbass1 | June 28, 2010 4:48 PM | Report abuse

lol-lol,

It's not pretending. Its fact. Liberals like to complain that FICA is regressive when the benefits are extremely progressive. Social Security replaces 90% of average annual income up to $9,132, 32% from there to $55,032 and 15% up to $106,800.

A high income individual (who has average monthly earnings of $106,800) pays 11.7x in taxes relative to someone who earns just $9,132/yr, but only receives 3.9x as much in retirement benefits. $13,670.04/yr in taxes for $32,041.80/yr in retirement benefits, vs. $1,168.90/yr in taxes for $8,218.80/yr in retirement benefits per my estimate.

If you assume that each class of worker saved instead of paying social security taxes, at a 4% compound rate of return the rich person would have a $1.3MM nest egg after 40 years, and the poor person just $111,075. Put these two values into an annuity calculator, and you'll see the high income person is worse off than if he had saved for himself, and the poor person is better off than if he had saved for himself. Looked at from this perspective, the rich are actually subsizing the poor via Social Security, and if included when talking about tax burdens makes the relative tax burden on the rich worse. This analysis also ignores that up to 85% of this rich person's Social Security benefits will probably be taxed, whereas the poor person's benefits will not be.

Now, this doesn't mean to say that there is no reason for a safety net. All this is saying is that the poor aren't getting a raw deal. Now you might think that geting less than $9,000 for retirement is an awfully low sum, but this is much better than what that person would have been able to do on their own (especially considering additional disability and survivor benefits if those are needed).

Posted by: justin84 | June 28, 2010 4:48 PM | Report abuse

justin84, do dyou ever go to school.. and if so , how many times did you flunk basic logic?

There's no Social security issue , that paying back Social security money that wa used by the federal govt wouldn't fix.

Posted by: newagent99 | June 28, 2010 5:15 PM | Report abuse

"Thank you, Dylan. Very interesting stuff. I'm surprised that fully lifting the cap along with raised benefits almost covers the long term shortfall."

Jpeg,

This is because income after about $4,586/mo income is only replaced at 15% in retirement, whereas income up to $761/mo is replaced at 90% and income in between at 32%. So if you make $18,900/mo and the cap is lifted, you pay $1,280/mo in extra taxes, but will only get $1,500/mo in extra social security benefits. Given the fact that most people pay taxes for far more years than they collect social security, this would represent a massive negative return. Obviously the program is even stronger if the rich don't get anything for their extra cash, but this is why getting rid of the cap does most of the heavy lifting without changing the benefit formula.

Social Security is a very progressive program. The rich and even much of the middle class would be much better off saving and buying their own insurance outside of the program.

Posted by: justin84 | June 28, 2010 5:16 PM | Report abuse

newagent99,

I've got bad news for you. My post didn't actually say anything about any "issue" with Social Security.

To be concise, all I was saying is that Social Security benefits are progressive - the benefit formula tends to replace a lower percentage of your earnings as your earnings increase. This is a point liberals often ignore when they discuss how regressive payroll taxes are. Yes, the taxes are regressive but the benefits are progressive.

Please try reading my post first before making ad homeniem attacks based on your (incorrect) perception of my education.

Posted by: justin84 | June 28, 2010 5:56 PM | Report abuse

justin84 is totally correct as may be seen at http://www.ssa.gov/OACT/COLA/piaformula.html

The SS benefit uses your average indexed monthly earnings, and is the sum of:

(a) 90 % of the first $761
(b) 32 % over $761 and through $4,586
(c) 15 % over $4,586.

No way is that regressive. This is the main reason why Bush wanted savings plans outside of Social Security; the desire for benefits proportional to taxes paid.

Seeing as the main macroeconomic problem is unemployment, we should change the fixed employer SS rate to be something like:

15 - unemploymentRate

so that we collect more in good times and less in bad.
This is a government for the people, and so we should arrange the tax incentives to encourage full employment.

Posted by: AndrewDover | June 28, 2010 6:16 PM | Report abuse

jpeg: "how do you tell a blue collar worker who has spent 45 years of back breaking, repetitively straining work that he has to work years longer? I am generally against raising the retirement age for that reason."

But that's probably not how it would be done. Those nearing retirement would have no change. Those further from the present benefits age might have it put off a few months. Only those who are many years away from the current retirement age would see the full effect, and so be able to plan accordingly.

Posted by: dasimon | June 28, 2010 11:48 PM | Report abuse

jpeg

Insolvency occurs in 2032 if nothing changes. That means in 22 years as the baby boomers are all retired SS will finally collect less taxes than it needs to pay out. After 50 years of surplus. That surplus is enough to get us through until the boomers are all dead and SS will be solvent again probably making a surplus.

Posted by: hihi22 | June 29, 2010 12:17 AM | Report abuse

The cap wasn't always that high. I can remember, in the early 1970's, that my net pay would increase late in the year because I had reached the cap - but each year the date when that occurred moved later. I had a good job but wasn't making huge amounts of money.

Any and every insurance company in the world would change and does change either premiums, or coverages, or both to keep the cash flow positive (from their standpoint.) They react to developments that affect that. It is not unusual or remarkable that Social Security should likewise change. The people are taxed to provide a benefit. As things change the tax rate and/or the benefit need to be changed. That is dull and prosaic. The right wing is not being honest. What they really object to is the Treasury paying back to Social Security what t has borrowed form them. Both because Social Security will no longer be funding part of the annual deficit and because the Treasury will have to start repaying the right wing recognizes that other taxes should be raised - and that taxes on the rich are going to be be among those raised. So they keep propagandizing in a way that legitimizes defaulting on that payment.

Also, everybody, please note that if $XXXX is spent every year to provide retiree benefits that that money comes form those working NO MATTER HOW IT FLOWS. It's the same $XXXX via FICA tax or via earnings on "personal account" investments. The advantage to the right wing of switching to "personal accounts" is that the $XXXX is no longer guaranteed. If you don't recognize that the inevitable result of that would be that retirees would lose a significant part of their pensions you'd better take a closer look. When that happened the right wing would glibly respond "We only said there was a CHANCE you'd do better. You didn't. Tough for you. We don't care (never did.)" (They'd leave off that last, although if stated it would be 100% true.)

Posted by: hewhoasks | June 29, 2010 10:21 AM | Report abuse

The cap needs to come off.

Look at all the entertainers, athletes, Wall Streeters, CEOs who make tens of millions a year paying FICA on only $106,800. of their income.

I just don't know WHY you don't want the companies that employ this sector to have to pay their fair share, too, like any other employer.

This is an enormous tax break for the super rich and their employers that should have been removed decades ago.

Posted by: edismae | June 29, 2010 1:18 PM | Report abuse

Social insurance? Now why hasn't the private sector thought of that?

Oh yeah, it's called "retirement plans." Liberals just like to take the responsibility for saving off people's shoulders at any point in time, and create some unsustainable program that they can tinker with as it begins to run into financial ruin. Never mind the fact that you paid into this "social insurance"...or, RETIREMENT program your whole life. If they've decided you already have enough, you're not getting it back.

Posted by: dnara | June 29, 2010 1:48 PM | Report abuse

Lets recall Klein previous comments

"Obama's finest speeches do not excite. They do not inform. They don't even really inspire. They elevate. . . . He is not the Word made flesh, but the triumph of word over flesh . . . Obama is, at his best, able to call us back to our highest selves." Ezra Klein

Why does anyone take this drooling Koolaid Drinker seriously?

Posted by: dencal26 | June 29, 2010 2:13 PM | Report abuse

Social Security was PAID INTO for a lifetime by most Americans. Want to compare Obamacare to Social Security ? Pay into Obamacare for the next 30 yrs before getting any benefits.

Posted by: dencal26 | June 29, 2010 2:14 PM | Report abuse

Since when did 90% stop being the law? Didn't Congress pass a law in the 1980s mandating 90% of all wages be subject to social security taxes. Didn't Alan Greenspan say that would make Social Security solvent forever? If they had actually collected the money over the last 28 years, there would not be a social security scare right now.

Posted by: ward29800 | June 29, 2010 3:05 PM | Report abuse

How about this, Mr Klein. Congress repays all pf the Social Security money they have ripped off, in the past, plus interest.

Posted by: swiftone | June 29, 2010 9:36 PM | Report abuse

Why don't Mr. Boehner and his fellow whiners of the "NO" party do something noble and symbolic to show they, too, care about our economic pickle which they helped create.

At the very least, they and their fellow "Congress Critters" could forgo their yearly COLAs, opt out of the socialistic single payer health-care system and show their constituents that they are truly concerned about the welfare of this republic.

Posted by: chamateddy | June 29, 2010 9:49 PM | Report abuse

chamateddy |

apparently you are not aware of YouCut - the republican website where we can vote on one of five spending cut initiatives - one of those voted on and presented to the floor by Republicans was no cost of living increase for the Congress....the Dems voted it down.

Posted by: LMW6 | June 30, 2010 11:56 AM | Report abuse

The comments to this entry are closed.

 
 
RSS Feed
Subscribe to The Post

© 2010 The Washington Post Company