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Eliminating the Payroll Tax Cap Would Ensure the Solvency of Social Security for 75 Years

03.14.13

By GREGORY N. HEIRES

As President Barack Obama looks to strike a “grand bargain” on the deficit by July, Social Security is being targeted for cuts.

But the alarm over the system’s supposed weak fiscal health is more about deficit hysteria than real facts.

Social Security will be solvent for years. And whatever tinkering it needs can be achieved without harming the overwhelming majority of beneficiaries.

Currently, the regressive payroll tax that funds Social Security maxes out at $113,700. That means wealthy individuals are not taxed on their earnings above that amount while the workers who earn less are taxed on their entire income.

One simple step—doing away with the current cap structure—would not only eliminate the inequity of the payroll tax but also guarantee the solvency of Social Security for three-quarters of a century without raising the retirement age or cutting benefits.

A bill sponsored by Sen. Bernie Sanders (Ind.-Vt.) calls for scrapping the cap.
His sensible proposal should be a part of the discussion as Washington politicians seek to address the deficit by introducing changes in the country’s three principal entitlements, Social Security, Medicare and Medicaid.

The Social Security system is currently fully funded until 2037, according to its trustees. Scrapping the payroll tax cap would virtually eliminate the projected funding shortfall for the next 75 years.

Unfortunately, the beltway power brokers and pundits—including President Obama—seem to be coalescing around a proposal to change the inflation formula used to set Social Security payments—and that would reduce benefits.

“Social Security is facing an unprecedented attack from those who either want to privatize it completely or who want to make substantial cuts,” said Sanders at a news conference on March 7 in which he announced his introduction of the bill to eliminate the cap.

“The argument being used to cut Social Security is that because we have a significant deficit problem and a $16.6 trillion national debt, we just can’t afford to maintain Social Security benefits,” he said. “This argument is false. Social Security, because it is funded by the payroll tax, not the U.S. Treasury, has not contributed one nickel to our deficit.”

Senate Majority Leader Harry Reid (Dem.-Iowa) is a co-sponsor of the legislation. Rep. Peter DeFazio (Dem.-) has introduced companion legislation in the U.S. House of Representatives.

Specifically, the Saunders bill calls for applying the 12.6 percent payroll tax to individuals with earned incomes of over $250,000. By kicking in at that amount, the legislation would only affect only 1.3 percent of the workers paying the Social Security payroll tax, according to the Center for Economic and Policy Research. For a millionaire and the employer, the new tax burden would be $46,500 each.

The scrap-the-cap proposal flies in the face of the notion that all of us must “share the burden” as the country addresses the deficit. But the deficit hawks who promote that agenda in effect are ignoring the reality that our country over the last three decades has become a plutocracy in which the wealthy have enjoyed the fruits of production while everyone else has seen their income stagnate and drop.

As inequality rises, incomes fall, traditional pensions disappear, and the 401(k) fails as a retirement vehicle, Social Security needs to be strengthened not gutted.

“Two-thirds of Americans who are over the age of 65 depend on an average annual Social Security benefit of $15,168.36 for at least half of their income,” wrote Thomas B. Edsall in a March 6 New York Times blog post titled “The War on Entitlements.” It is people like them who will suffer if the predominant “reform” proposals—raising the retirement age and cutting benefits—are adopted.

The proposal to adjust the Consumer Price Index used for calculating the Social Security benefit—known as the “chained CPI” is one of those proposals. It would constitute another attack on the standard of living of recipients. Using the chained-CPI formula for determining benefits for Social Security would result in the typical 65 year old living on some $15,000 a year receiving $650 less each year when they turn 75 and $1,000 less a year when they turn 85, according to Sanders.

“We shouldn’t cut benefits or try to balance the budget on the of seniors who have earned these benefits,” said DeFazio. “We can just close a tax loophole that allows millionaires and billionaires to pay a lower percentage of their income into Social Security than everyone else.”

“Ninety-four percent of the country pays Social Security taxes on all their income. Six percent do not. This has got to change,” Sanders said.

Posted on http://www.thenewcrossroads.com on March 11, 2013. This article was previously posted on the Daily Kos on March 10, 2013.

1 comment so far

This may be the best article on the subject I have ever read. I have long advocated for this very policy change.



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