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Raising Payroll Tax Cap is the Best Fix for Social Security

April 12, 2013

The United States may have serious longer-term fiscal problems, but Social Security is not chief among them. After all, the Social Security Trust Fund has a $2.7 trillion surplus and will continue to grow until 2021. Even though the population of Americans over 65 will grow by a third over the next decade, by 2035 Social Security's share of GDP is nevertheless forecast to increase slowly from just under to a little above 5 percent. Meanwhile, the program provides 40 percent of the cash income for American retirees, reducing the poverty rate among the elderly from 43 to just 9 percent.
These are just some of the reasons why President Obama's proposal to cut the growth of future Social Security benefits by moving to a different cost of living measure is so ill-advised. But there's one more argument against adopting the "chained CPI" (consumer price index). As it turns out, raising the payroll tax cap from its current $113,000 to $200,000 will generate far more revenue and deficit reduction for Uncle Sam without trimming benefits for millions of seniors already so close to the edge of financial distress.

(Click image to visit interactive budget tool.)

As David Cay Johnston explained, on its current trajectory Social Security will only be able to pay out three-fourths of its mandated benefits beginning in 2033. To address this future shortfall, Lori Montgomery of the Washington Post reported, President Obama:

...proposes to slow the growth of Social Security benefits through chained CPI, trimming cost-of-living increases by roughly three-tenths of a percentage point a year and saving the government about $130 billion over the next decade.

But as Johnston documented last year, there are no shortage of other approaches for putting Social Security on a sound footing for decades to come. Among them would be to raise the amount of income on which FICA payroll taxes are assessed:

One would be restoring the Reagan standard that 90 percent of wages are covered by the Social Security tax, which now applies to only 83 percent of wages. If we went back to the Reagan standard, the Social Security tax would apply to close to $200,000 of wages this year instead of $110,100.

As the New York Times reported in November 2010, that one change would produce $50 billion in new revenue in 2015 and reduce the deficit in 2030 by an estimated $100 billion. As the Times explained in its interactive "You Fix the Budget" tool (image above) here's how it would work:

When the payroll tax - which finances Social Security and Medicare - was created, it covered 90 percent of all income. Today, with a ceiling at $106,800, it covers closer to 80 percent. This option would gradually raise the ceiling, until 90 percent of income was again subject to the tax.

A variation is the one proposed by then candidate Barack Obama in 2007 and introduced to the Senate by Bernie Sanders (I-VT). Sanders' bill would impose the payroll tax on incomes above $250.000 a year, a move guaranteeing the program's future for 75 years. Either way, the Center for Economic and Policy Research (CEPR) suggested last May, we're talking big numbers here. All told, 8.3 million American workers make more than $110,000 a year; almost two million make over $250,000 annually.
According to the New York Times 2010 analysis, raising the payroll tax cap to its traditional 90 percentile wage ceiling would improve Uncle Sam's budget outlook more than just about any other Social Security alternative under consideration. The chained CPI option would save $21 billion in 2015 and $82 billion in 2030. (It should be noted that the chained CPI produces deficit savings elsewhere in the federal budget. But according to former Obama OMB chief Peter Orszag, the total savings in future years may be less than forecast due to smaller differences between the chained and current CPI metrics.) Means-testing benefits, tightening eligibility for disability benefits and raising the retirement age to 68 wouldn't aid Social Security's sustainability as much. Raising the retirement age would ($13 billion in 2015, $247 billion in 2030), but at a very steep cost to the elderly (and even some children).
To be sure, using the chained CPI to set annual Social Security cost of living adjustments would hurt seniors as well. Dylan Matthews estimated a benefits cut of 3.5 percent (or $849) for someone who retired in 2001. "Of course," As Matthews put it, "a 3.5 percent cut in income matters a lot more when you're barely clearing $20,000 a year than it does when you're making a regular middle-class salary."
That statement happens to apply to a lot of people. As USC Professor Edward Kleinbard warned in February, cutting Social Security benefits seems particularly dangerous when the program provides almost 40 percent of the cash income for all Americans ages 65 and older. Twenty three percent of married seniors and 46 percent of single seniors depend on the program for 90 percent or more of their income. And without it, the Center on Budget and Policy Priorities (CBPP) recently reported, 14 million more seniors would live below the poverty line, a staggering jump from 8.7 percent to over 43 percent:

No doubt, calling for an increase in (or the elimination of) the payroll tax cap won't be easy for President Obama. Republicans, needless to say, will reject any tax increase out of hand. And during his both his 2008 and 2012 presidential campaigns, candidate Obama promised he would not raise taxes on American households earning less than $250,000 a year. But to stabilize Social Security in the long term without cutting benefits, that's a promise worth breaking. Especially when candidate Obama promised he wouldn't adopt the chained CPI, either.


About

Jon Perr
Jon Perr is a technology marketing consultant and product strategist who writes about American politics and public policy.

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