Raising the Social Security Cap: Policy and Politics

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

The chief benefit of raising the cap is *cash flow*, getting more money into the system now to cover the hump of retiring baby boomers.

A) Fully Lifted, With Benefits If high-income earners were taxed on all their salary and received proportionally higher benefits when they retire it eliminates more than 95% of the shortfall, and leaves them little to complain about. (They wouldn't get 100% value because the pay-out system is somewhat progressive, but they would get more the more they paid in.)

B) Fully Lifted, Capped Benefits If high-income earners were taxed on all their salary and received only the benefits due to someone making 90K when they retire it eliminates 115% of the shortfall, but politically it turns SS into a welfare program. (The historical defense of SS is that it is not a welfare program. Everyone gets back based on what they paid in.)

When we talk about raising the cap as practical policy we are talking about option A. Option A is, or should be, a no-brainer. Option B is perhaps just, but is a political non-starter.

The Democratic Socialist in me would be fine with Option B but Option A is all that is going to be even on the table, and it does in fact save social security to whatever degree it needs saving.

And any earner who complains about Option A is too greedy to be taken seriously.

(The people with a more legitimate beef would be employers. I would be interested to see the numbers with the employer contribution capped at about $130K salary but the employee contribution entirely uncapped.)

Something that avoids additional taxation between the currrent cap and $250k... but then picks the tax back up above that point. Both with and without additional benefits.

This would avoid adding to the list of "he said he wouldn't add a penny in taxes to anyone making less than 250k!" complaints.

One of the drags on cap-raising is that a lot of things would be restructured to evade the provision.

Companies will certainly change their behavior to adjust to tax code changes.

That could easily mean swapping cash compensation for other benefits at a far lower salary scale than currently exists in most companies.

The problem is Obama ran on a promise of not raising any taxes on those making <$250K.

Thus if Obama were to keep his promise and raise the cap it the SS payroll tax would look something like this:
6%* on wages from $0 to $106,800
0%* on wages from $106,800 to $250,000
6%* on wages above $250,000 (to cap or on all wages).

* SS is 6% of wages paid by employee plus 6% paid by employer.

Obviously that:
a) is stupidly complex for no reason.
b) will generate much less revenue (how much would require some access to IRS stats)
c) makes the system less progressive that a pure cap raise.

It is entirely possible that raising SS taxes w/ a doughnut will not provide any meaningful increase in contributions. I base this assumption on two facts. First less than 2% of Americans make >$250K. Second non-wages make up a larger % of the very rich compensation.

I think wages from $106,800 to $250,000 would be a big part of the cap-raise benefit.

What would it look like if we capped defense spending at 75% of their current budget. We could direct that other 25% into Social Security.

The only reason we are even talking about Social Security is because Pete Peterson hates poor elderly people and wants to get that money Ronnie Raygun made us Baby Boomers put away for our retirement. That's about 3 Trillion dollars Pete Peterson wants to give to his grandchildren. Even though the Baby Boomers were the 1st generation to pay for BOTH their own and their parent's retirement, the baby boomer's sacrifices should be Pete Peterson's, and all the Con Artist's on Wall Street, windfall profits. They want it, they know it's there and Raygun promised it to them.

No other generation has or will, pay for BOTH their own and their parent's retirements. But the uber wealthy and the Obama administration want to END SOCIAL SECURITY AS WE KNOW IT through the Cat Food commission.

President Obama is going to make sure we Baby Boomers sacrificed our money for NOTHING.

I would applaud a 75% cap on Defense but would not put the money to SS.

I would probably put it to jobs.

There are so many priorities, and SS is popular as is and fully fundable with tweaks.

Because they ignore the effect of the employer contribution, which would make employers cut wages for high earners. And for every lost 1K in total wages for these types, you are losing far more in income tax than you are gaining by the 6.2% employee + the 6.2% employer. Top rates are currently 35% and are set to go to at least 39%. And since this money comes right off the top, it is going to be taxed at the higher percent.

So in effect, to raise total revenue you can only raise the wage base or lift the employee's side of the cap. Okay? That's part one. And right there, it cuts in half the total expected revenue gains.

And you can't say it doesn't matter, because the operation of the trust fund requires the general fund to pay it back as SS needs it. Cutting total tax revenue won't allow that.

Also it is 6.2% for each portion.

And you can't offer much in the way of increased social security, because the employer side of the payment isn't being made. Current high-income payments only returns about 15% benefits; you'd only be able to add 6-7%.

So no, lifting the wage cap wouldn't fix it. Nor would raising the wage base; only about 10% of US HOUSEHOLDS have total income over 100K. There just aren't that many people who earn wages that high.

No matter how I run the numbers, I only come up with the elimination of the wage base cap closing about 60% of the gap, and even that seems implausible. It is relatively easy for high income earners to shift remuneration from wages and salaries to bonuses, options, etc. And absolutely no working economist is going to tell you that you can raise the highest income earners' wage taxes by over 10% without getting some shift in compensation patterns. And when you do, you have to back out the total effect on federal revenues.

Because it is mostly the very high income earners who are able to shift compensation almost at will, the very high probability is that raising that cap rather than eliminating it will generate the most total additional federal revenue.

In reviewing the Congressional Research Service report the cart is derived from I see that they do not make any adjustment for legal evasion or high-wage reduction.

That said, I do not agree that wage reduction should be scored at full 100% capture of the tax rate for the gap. There would be some modification needed on that side also.

And losses of SS revenue from inventive compensation schemes do not equal in full loss of govt. revenues -- options, bonuses or whatever remain taxable one way or another.

I would lean toward something like raising the cap a lot, cutting the employer end of that raise in half and raising the SS tax rate 0.3% and see where we are in twenty years.

High wage earners won't take cuts in pay due to SS tax because, in general, they ARE the boss.

If he makes $500,000/year, the total employer's share of ss tax will go from to $6,300 to $31,000. So let's take your argument at face value - the boss will cut pay to compensate.

So, instead of $500,000/year, the poor hapless guy is now only making $475,000. His Social Security tax on that salary is $29,460 so, (again - assuming you're right) the projected revenue increase from this guy is overstated by $1500.

At least as likely is the reverse. Since this guy is most likely signing his own paychecks, he'll raise his salary to compensate for the $25,000 additional tax.

I don't buy this "don't raise taxes on the rich because they'll just cheat" crap for one second.

non-wage compensation.

Say CEO is getting $500,000 a year. Currently it is $300,000 cash and $200,000 stock options (or other deferred compensation). Cap is removed.

Company changes his compensation to $150,000 cash and $350,000 deferred compensation. Net-net only $50K more is taxed not $200K.

This is a pretty common phenomenom and has to be considered. It isn't that they will cut their salary so the net increase is $0. That would be stupid and nobody is making that claim. However if cost of wages rises then they will simply collect less wages and more non-wages. That compensation package will be tailored to maximize return for both executive and company.

He's wrong.

Yes, any decent tax analysis takes into account behavioral changes resulting from the proposed tax change.

Human nature is the same regardless of income. The guy who makes $500,000 usually has a lifestyle which requires $500,000 to support. They will defer their compensation only to the degree that they still need to make that $9,000 house payment.

Alternative A) will result in the Social Security administration sending SS checks in the amount of $20,000/month to retired CEO's, who got rich because of the tax cuts which were financed by the tax hikes on workers.
Alternative B) will result in the more widely-held belief that SS is welfare. In fairness, the conventional wisdom is already that (e.g. entitlement = welfare)

Alternative B is the least undesirable.

as if it's just an underfunding problem. That's not the case. SS is underfunded because it was looted. It's like any other retirement fund that becomes underfunded because the trustees looted it. Sufficient funds were paid in, but the trustees handed them over to crooked politicians who used them to fund pet political projects in direct contradiction to the purpose for which the money was collected, viz. SS. It was a massive fraud. People were told the excess money would be there for their retirtement, when in fact the politicians were looting the fund all along and the money is gone. It's no different from what has happened in a number of private retirement systems where trustees looted employee contributions and the retirement system ended up underfunded or without any funds at all. And the people who were given the siphoned off funds had pissed away the funds and were broke and couldn't pay back the money or notes or IOU's or whatever they pledged. That's where SS stands.

Under normal circumstances when authorities become aware of a massive fraud of this sort, the sirens go off and law enforcement and prosecutors investigate, conduct accountings, and build criminal fraud charges against the looters and their accomplices. That's what should be happening in the case of SS. Instead, in an effort to cover up the fraud, the politicians are brainwashing people into believeing that they are the cause of the underfunding because they have received too many benefits or have not paid enough SS taxes -- which of course is a big lie.

Any effort to make SS more solvent must start with an investigation into the fraud to determine who took part and their level of culpability. Also, an explanation of how the fraud was pulled off and where the money was spent. The investigation should be the first order of the day. There should be no discussions concerning raising taxes or cutting benefits until after the investigation is complete and charges placed if possible. We need a man of the people type prosecutor who will strictly look out only for the interests of SS plan members and contributors.

That's what has to happen before any discussion of shortfalls in funding can start. And we have to look at all options for getting the money back. To come back to the people and ask them for more money act as if they haven't contributed enough and therefore it's necessary to raise taxes or reduce benefits would simply further the original fraud.

STOLEN! They ripped us off! And they're trying to rip us off some more!

Don't stand for it! Don't buy their lies!

The money you deposit in the bank is spent. It is loaned to other people and spent for a variety of purposes.

Social security is exactly the same, except it deals with megatrends and on a longer timescale. Those "IOU's" are physical treasury bonds, in physical file cabinets, physically imprinted with the words "backed by the full faith and credit of the United States of America".

They are not simply worthless notes, and the federal government does have the ability to redeem them for the purpose they were intended; - supporting boomers in their retirement.

All they have to do is raise taxes.

Raising taxes is difficult? To paraphrase Spiderman, I missed the part where that is my problem. Boomers consented to a multi-trillion tax hike in 1983 so we wouldn't be a burden on our kids. I did my part.

The first step in "getting the money back" is to bitch-slap everyone who utters the words "worthless IOU". Social Security surpluses are invested in the safest investment possible; US bonds, the only risk is political; that hysterical fools not elect people who tell them the money is gone.

The question becomes, who owes you? There is no third party here (no bank, in your analogy)--"the government" gets its money from workers (corporations pay little in federal taxes.) So, in essence, you are saying that younger workers "owe" you...

"Boomers consented to a multi-trillion tax hike in 1983 so we wouldn't be a burden on our kids. I did my part."

Your children pay the same FICA rates as you, Jeff, and will also need to retire one day. Deep down, I think you must understand that we cannot put this entirely on their back.

Corporations and investors pay little in federal taxes precisely because excess Social Security taxes have enabled politicians to give them tax cuts.

The federal government OWES the Social Security trust fund. The fact that many of the stakeholders in the former are also stakeholders in the latter doesn't change things.

Workers have the reasonable and legally binding expectation that the trust fund will be used to support their needs. Boomers agreed to pay far more in Social Security taxes than were required to support our parents generation, for the purpose of enabling our children to pay far less.