The SS cap is a political question, not an equity question

The great popularity of the Social Security program is that it is not perceived as a welfare program, or a wealth transfer. (It already is to some degree, but this post is about how it is perceived.)

Eliminating the SS tax cap disconnects SS benefits from SS payments and marks SS as a welfare program. It is great to have a welfare program for retirees. I am all for it! It is, however, a really dumb idea to have any welfare program funded through a distinct line item on every paycheck. Eliminating the cap will injure popular support for SS in a way that supplementing SS from higher general revenues would not.

This is not a question of whether someone making $125,000 should pay more in support of these programs. Of course they should! You tell me how much money is needed and I'm down with raising that amount of revenue from people who can best afford to pay it.

From a practical perspective, it makes little difference whether an extra $1,000 is paid from FICA or income tax, capital gains tax, dividend tax, etc.

From a political perspective, raising that $1,000 as specific Social Security tax is a disaster. It is a ready-made red-flag, going forward for a generation, for those who want to gut Social Security.

Jim Gilmore was elected Governor of Virginia on a single issue campaign of eliminating the "car tax" (The state personal property tax) It was an easy campaign to run because everyone in VA pays the personal property tax separately. If the same small tax was folded into the VA state income tax nobody would have even noticed, but because the "car tax" was paid separately it made it an easy target.

Medicare part D is actually facing a crisis, and adding to the entitlement taxation line for SS while Medicare is facing a major overhaul is, politically, a stone loser.

As I see it, SS is a redistribution of wealth. The portion you pay in over a lifetime and the portion you can potentially get back post retirement completely favors those who pay in a little (low income folks). It is hard to find the data on this sliding scale that favors the low payers but someone posted yesterday that the maximum monthly SS distribution you can receive was $1700 a month in 2003. I assume the minimum is like $300-400 a month. Therefore if you contributed on a base salary of $3,000 a year or $97,00 a year over a lifetime the variance on your monthly distribution is at most $1400. Obviously, social security is a poor investment for the high end earners. If uncapped and the maximum monthly benefit remains the same it is a really, really bad investment for the high enders.

That said, I think what you are saying is that if the current cap ($97,500 this year) is raised it will shine a very bright light on the fact that the program is massive income redistribution and will make a lot of folks notice it really for the first time and get up some anger about the actual purpose of the program. Hillary is trying to turn that light off because she wants SS to remain in place with some tweaking. I think she is right. The last thing this country needs is for more people to understand the true nature of this particular entitlement because it will lead to privatization.

So, I think what you are saying and what I agree with is, keep the cap in place and find other ways to tax the upper income people.

Did I get it?

I think you've got it.

Someone making $90,000 pays in more than they will ever get out, and low income folks will get more than they paid in (assuming they don't die too early) So it's a little bit of a welfare program, but the current level of progressivity of SS taxes has been around for a long time now, and people are pretty comfortable with it. Upper earners know they pay extra, but they are comfortable that everyone pays and nobody pays a really big amount.

As things stand, SS remains a very popular program. (That's why we were able to beat back privitization. Few people are upset about the status quo in SS)

And eliminating the cap would change that political dynamic, and for little purpose. There is no pressing crisis in social security that needs to be addressed. (Unlike other programs that really are in crisis)

Since eliminating the cap on 2030 or 2040 would restore full solvency to SS, so I don't think it's a good issue to be talking about during a political campaign in 2008.

Fact: Low-income, lower-educated people die younger than upper class. I'm not sure I agree that low-income people get more than they (and their employers) paid in, as old-age benefits. (I'm disregarding disability payments for the time being.)

Maybe someone has some statistics on this?

I do not regard SS as a wealth distribution program at all.

If this were the case, for example, I would've expected to hear some of this during the arguments for privatization. I heard nothing along these lines from the right-wing. The argument for privatization was that the average citizen could earn a higher return over his lifetime and end up with more money, and additionally, that it would become part of the estate and be inherited by the kids.

The small transfer element is probably offset by mortality rates

for any government social program.

As for Social Security the minimum benefit is in terms of a 2 digit income per month (yeah - try living on that - indeed that is why a goodly percentage on Social Security are also on welfare)- there is no max - normal retirement this year is now at age 66 because of the Reagan law that moves the retirement age to 67 over the next several years and has a "max" of 2300 because that is the result of a cap on taxable wage base applied to the formula.

The proposal is to remove the cap - and pay whatever increased benefits the formula produces. The effect is the more you make the more you pay and the more you get as a benefit.

If you argument is against a progressive formula (the rich are not making a good investment I believe was your point) - then you understand where the GOP priorities are.

The op argues against unlimited benefits - I do not.

The effect of no wage cap with unlimited benefits is 1.75 percent of payroll better funding - cap the benefits increases that by only 0.3 percent - and like yourself I agree that the 0.3% is a small price to pay to keep the program from becoming a welfare program.

Even if the cap is eliminated, a $million earner would pay the same percentage as a $75,000 earner. (The progressivity is a function of paid-in versus paid-out, but not of the tax itself.)

The OP did not argue against unlimited benefits, merely accepted that benefits are currently capped. If I am wrong about that, then I withdraw it. My undersatnding is that the current benefit cap is below the implied return on the current taxable income cap.

If the proposal is to un-cap benefits also, then I must admit I am lost... how does that save the system? It would just magnify the current state of affairs.

Is it an accounting thing? Take a lot of money today by promising a lot of money tomorrow?

I am confused.

final benefit.

All money brought in by removing the cap would be "15%" money - and as the fellow noted the rich would be overpaying for their increased benefit - that overpayment makes the system more solvent

The deficit even under the overly conservative Bush assumptions is 1.9% of payroll over 75 years - no cap with unlimited benefits reduced the deficit to about 0.1%, no cap without unlimited benefits turns deficit into surplus of about 0.2% over 75 years. The 0.3% swing keeps the program from becoming welfare - "means tested" as the GOP would say and recommend.

But there really is no reason to do anything - the 3rd and most likely in my opinion projection shows no problem - ever.

But as noted the payroll tax is a flat percentage - it is not progressive like the income tax is in theory - but not in reality as Buffett noted - is. Capping the tax actually makes it regressive - the richer you are the lower the tax as a percentage of your income. And it is a tax only on wages - the rich live off of investment income and that is tax free relative to Social Security.

Finally, there is absolutely NO FORMAL CAP ON BENEFITS in Social Security - the max is just the result of the formula being applied to wages that are capped.

Gotcha. (If it were entirely unlimited there would be no gain in expnading th range, but if higher incomes overpay by 15% over the bend point that makes sense.)

I any event. I agree that there really is no reason to do anything.

would also make it just an income tax, subject to all the pressures and calls for reducing it and making it part of the progressive tax system we all, um, enjoy. We've already heard calls for it based on its de facto status, and on principles of "social justice"; altering its de jure status would license further calls, and they'd probably stick.

This would make it easier to cut SS, and harder--it would be more blatantly wealth transfer, and more easily means tested. It would disestablish the mythic and mythical "trust fund" in its present vacuous "lockbox" incarnation.

Most arguments made on the basis of that kind of change are at least 2-edged. Some are 3-edged (showing that Minbar had a very good SS system at some point). And some are simply n-edged, where n is in the set of real integers and is finite. (I suspect at least one is a phasor, and I'm not sure we are allowed to only take the real part.)

I just don't want it to increase noticeably for people making over $100,000 because that group has a lot of political clout, and currently support SS pretty much.

If we eliminate the cap in 2040 it would fix the problem, so I have no idea why we're talking about it in a campaign in 2008.

But if we really did need to do something today, there's no sense in getting the needed money from the SS tax. Even if the cap is eliminated, SS is still a flat tax, compared to other federal taxes.

Why not get the same money from a truly progressive tax while not reducing upper-middle-class support for SS?? Yes, people will complain about any tax increase anywhere, but with general taxes people can see the sense in them. Republicans can pretend it all goes for bombs. I can pretend it all goes for roads and bridges.

But as a line item, all upper earners would know their SS tax was going specifically to lower income retirees. There's no cover for it...

We managed to save SS from privatization once. I don't want to feed the anti-SS PR machine, is all.

(I am probably less expert on this than you are. I am accepting Paul Krugman's assertion that there is no current crisis, and that eliminating the cap decades from now would solve the problem.)

my own to include investment income in the tax base for Social Security.

That is why a dedicated tax not taxing investment income but with no cap on wages and accepting the resulting unlimited benefits is my choice for Social Security action. To get the GOP on board I'd add an increase in the Reagan age 67 retirement age for full benefits - but not start that process until the boomers are retired - say around 2030 - since it simply is not needed until then.

I agree that SS has support because it's not welfare. It's also not a retirement plan, it's insurance.

If:
1) we accept that the projected 30 year shortfall in SS is both real and a problem that needs solved immediately, and
2) we accept that increasing taxation, as opposed to slowing the rate of benefits growth, is the solution, then;

The potential revenue sources for this tax hike are the workers who currently pay, or the workers whose earnings are above the cap, or people whose income is unearned. Of the three choices, it seems to me that the revenue source which is most likely to cause the system to be perceived as welfare is the third. Taxing those who can't benefit to finance future benefit hikes is, arguably, wealth transfer.

At least high income earners will get some benefit from SS, if not proportional to their pay-in.

In political terms, the size of the affected group matters in the calculation. There are probably more workers whose earnings are above the cap versus people whose income is unearned. (If that's not the case, then the politics shifts.)

My perception is that Democrats do better with high-income suburbanites than we do with entrenched capitalists. (Despite the counter examples of high-profile Dem-leaning philanthropists) So in purely political terms I'd prefer the burden not fall on persuadable voters.

And a massive SS surplus will be a constant attraction to people who want to put that capital into the market to raise the value of their existing portfolios, so I am leering of making the program vastly larger to pick up a small percentage on the margins. (Again, a largely political calculation)

Mostly though, my objection is to the proposal, more than the implementation.

It's a political loser playing into the worst perceptions of Democrats, and made to address a problem that does not exist.

Since we cannot even convince people that the "death tax" doesn't cut in until 14 million or whatever it is, I despair of convincing average people that raising SS taxes will not affect them.

I see from the replies that I should not have opened my mouth about the actual finances of SS. I am inexpert about them, and they don't matter much to the political question, which is what I was addressing.

No Democrat should be talking about raising Social Security taxes because there is no crisis that requires talking about it right now, and it is terrible politics because almost everyone pays SS taxes.

The public doesn't do nuance. Even minimum wage workers who pay no income tax pay a fair amount of SS tax, and they know it.

If you talk about raising a tax that everyone knows they pay it is terrible politics because nobody ever believes it doesn't apply to them.

The Federal estate tax is a perfect example. We have all seen rooms full of people at Republican rallies stand and cheer over the elimination of the "death tax" despite the fact that it does not apply to hardly anyone in the room.

Lots to think about.