Rather Than Slashing Social Security How About Lifting the Cap?

http://voices.washingtonpost.com/ezra-klein/2010/06/research_desk_responds_could_r.html

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 Servicelooked 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:

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

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

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WED JUN 13, 2012

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The Center for Economic and Policy Research has released a new report looking at the effect of raising or lifting the payroll tax cap on Social Security contributions.

Incredibly, most people still don’t realize that workers who earn more than $110,100 don’t contribute on their full income and that simply removing that tax loophole for high earners would close the vast majority of Social Security’s modest long-term funding gap. Legislation introduced by Senator Bernie Sanders (I-VT) and Rep. Peter DeFazio (D-OR) would apply the same payroll tax already paid by more than 9 out of 10 Americans to those with incomes over $250,000 a year.  Making the wealthiest Americans pay the same payroll tax already assessed on those with lower incomes should be a no-brainer and it is the solution Americans prefer rather than cutting already modest Social Security benefits.

Lifting the cap also recaptures income lost to Social Security because of the growing income inequality in this nation that has allowed a growing number of wealthy Americans to avoid paying their fair share.  Robert Reich describes how:

Back in 1983, the ceiling was set so the Social Security payroll tax would hit 90 percent of all wages covered by Social Security. That 90 percent figure was built into the Greenspan Commission’s fixes. The Commission assumed that, as the ceiling rose with inflation, the Social Security payroll tax would continue to hit 90 percent of total income.

Today, though, the Social Security payroll tax hits only about 84 percent of total income. It went from 90 percent to 84 percent because a larger and larger portion of total income has gone to the top. In 1983, the richest 1 percent of Americans got 11.6 percent of total income. Today the top 1 percent takes in more than 20 percent.
If we want to go back to 90 percent, the ceiling on income subject to the Social Security tax would need to be raised to $180,000. Presto. Social Security’s long-term (beyond 26 years from now) problem would be solved.

Unfortunately, rather than embrace lifting the payroll tax cap, many Republicans and Democrats alike now seem to be rallying behind the Bowles-Simpson (BS) plan, which proposes two-thirds benefit cuts over one-third income increases.
Ask your member of Congress…does he/she support cutting benefits for middle-class Americans rather than restoring contributions by the wealthy to their historic levels?