Social Security – Part 14: Raising the Salary Cap

Back in Washington this week after their long break for President’s Day, many Congress members reported less than enthusiastic support for Social Security privatization at the town meetings they held around the country.

“Some Republicans were shocked by the intensity of opposition expressed…Sen. John W. Warner (R-Va.) said that at a meeting he conducted. “People [were] saying, ‘Hey, wait a minute. Let’s deal with this Medicare-Medicaid situation first. That’s where my greatest pain is.’”

- Washington Post, 2 March 2005

Lawmakers are so concerned about negative response to the plan, some are saying out loud that there may not be a vote on it this year and by next year, mid-term election campaigns will preclude action on such a volatile issue.

Several new polls are good news for Crabby Old Lady's point of view. A nationwide survey by the Pew Research Center this week shows support for privatization down to 46 percent from 58 percent in December.

In the New York Times/CBS survey released on Thursday, 51 percent of respondents said permitting private account is a “bad idea.” That number jumped to 69 percent when those surveyed were told privatization would result in reduced benefits.

The Salary Cap
In the same survey, 61 percent favored raising the salary cap on which Social Security payroll taxes are collected above the current ceiling of $90,000. Even Mr. Bush has conceded this is a viable idea, but Republican Congressional leaders shot it down.

Crabby Old Lady wonders which of their constituencies those Republicans are thinking about. Could it be the average Joe who wonders where the money for his kid’s orthodonture will come from? Or could it be Mr. and Mrs. Moneybags who contribute big bucks to their campaigns? Or the equally deep-pocketed corporations which match workers’ payroll taxes?

The average U.S. income is $40,000 a year. That means most people are taxed for Social Security on every penny of their salary. High income workers, on the other hand, are taxed only up to that $90,000 cap.

Although it has been chipped away at by recent tax cuts for the wealthy, we do still have a graduated income tax whereby wealthier people pay a larger percentage of tax on income than lower-wage earners. It is based on an economic theory that those with more should contribute more to the common good. There is no reason this same philosophy should not apply to the Social Security tax.

That average Joe Crabby mentioned pays $2,480 of his annual $40,000 salary into the Social Security fund. That’s a big chunk of change at that level of income, but it secures his old age.

At the other end of the scale, a worker with an income of, for example, $250,000 is taxed the same dollar amount as the person who earns the $90,000 Social Security cap: $5580. Is that fair? Crabby asks. If the cap were eliminated, the guy with a quarter of a million income would pay $15,500 into Social Security, and Crabby believes that anyone taking home $234,500 (minus whatever income tax he pays) can’t live comfortably is, as Oscar Wilde put it, “someone who knows the price of everything and the value of nothing.”

Nobody ever got rich on Social Security, but the program keeps 40 percent of older people from falling below the poverty line. The value of that is inestimable.

As to the matching funds corporations are required to contribute, Crabby believes that is just a cost of doing business. Corporate America has been raking in increased profits due, in large measure, to eliminating or charging employees more for health coverage and by the fact that salaries (if you don’t count obscene executive pay) have not increased more than one percent in a decade. And many corporations have moved their headquarters offshore to foreign post office boxes, eliminating their income tax burden entirely. They can afford a little more in matching Social Security taxes.

America’s budget deficit must be addressed, but Fed Chairman Alan Greenspan’s urging this week that it should be done, against all sane evidence to the contrary, by curtailing future Social Security benefits makes no sense. Social Security needs only a few tweaks to maintain benefit levels for many decades, and many experts say eliminating the salary cap and raising retirement age two or three years (which most Americans oppose, so far) will do it.

Crabby believes these two changes will be the least painful to the largest number of people.

Senator Chuck Hagel, a Republican from Nebraska, has been developing a secret plan for Social Security that he will unveil in his home state of Nebraska on Monday. It includes, according to The Hill, raising the retirment age to 68 and allowing workers 45 and younger to create private accounts with four percent of their Social Security payroll tax. The senator will appear on CBS-TV's Face the Nation on Sunday.

Meanwhile, keep up the pressure, as Crabby does once a week, on your Washington representatives. You can do that easily at this website.

...to be continued...

Social Security Privatization Series Index

Comments

[Louise]

Do you know if the salary cap is also there when the amount of the social sercurity payment is calculated?

In other words:

Say I made 200k a year for all 30 of my highest paid working year (haha, as if). Is my social sercurity payment based on the average (200k) or is it based on the amount on which I was taxed during those years (90k).

It seems to me that it would be unfair for someone to get a payment based on earnings on which he or she was not taxed.

[Ronni Bennett]

Generally, benefits are calculated on average monthly earnings during the 35 years in which you earned the most. But there are other calculations and it is complex. You can find out more about it here.

[Another Dreamer]

I guess if Americans, especially those approaching retirement age, aren't willing to fight for Social Security...perhaps they don't deserve it.

I know, its much more complex than that. Anyway, good to see someone such as yourself taking a pragmatic approach and doing what you can.

[Primer]

Thank you for this excellent series. There is one mis-statement, however, that minimizes the negative impact of Sen. Hagel's plan. You wrote:

"... allowing workers 45 and younger to create private accounts with four percent of their Social Security payroll tax."

I believe the plan calls for up to four percentage points of ones SS payroll tax to be diverted into private accounts, not four percent.

Take for example of a worker making $40,000 a year. The worker pays $2,480 (6.2% of the worker's salary) and the employer matches for a total SS payroll tax of $4,960 (12.4% of the worker's salary).

Under Sen. Hagel's plan, 4 percentage points of the 12.4 percentage point total would be diverted into private accounts. That's over 32% of the worker's SS payroll tax ($1,600), a far cry from 4% of SS payroll tax ($198.40).

Proponents of this plan who state 4 percent of SS payroll tax when they mean 4 points of the 12.4 point total, are understating the negative impact on the longterm solvency of SS.

Thanks again for the series.

[Ronni Bennett]

Primer is absolutely right. I mis-spoke and as he(?) points out, it's a big dollar difference by which, in retirement, the Social Security benefit would be reduced however successful or not the investment had been.

[concermed citizen]

Putting a tax on my social security benefit monthly payment is the most asinine and crooked thing that the government could do. I Paid high social security taxes for over 50 years, and now they want to tax the hell out of me, as well as gouge me on gasoline prices, food, and clothing prices, health care prices, and the most crooked of all, insurance prices!

[Cop Car]

When did our government of the people, for the people, by the people become "they". They is us.

[Mallika Bachan, 29]

I'm comparatively new to the working world, so I didn't know about the $90,000 cap -but it makes perfect sense to me. You're right, the rich already pay a larger percentage of their income in income tax. That precedent does not automatically mean that we should hem them in on all sides. Next you'll be saying they should pay more in sales tax! After all, all tax money is for 'the common good'. I think its important for people at any income level to have enough of an incentive to earn more money.

About retirement age being increased to 68 -its obvious why thats a concern. I know that as life expectancies increase, retirement ages must accordingly be pushed back. Yet, a good many people probably believe that pushing retirement age another two-three years may be enough to push the benefits of social security almost beyond their reach, even though its something they've been paying for all their lives. Would you rather get fewer benefits for something that you've been paying for, or none at all?

In the end, what you suggest may be the best way to go, but basically I wanted to point out that though these redresses to maintain the system may appear like 'small tweaks' to you, that they are not small or obvious tweaks for many of us.

[Pat R.]

Eliminating the salary cap makes good sense in more ways than one in that whatever salary a person gets in one year is not guaranteed to be there the next, even if a person is making $200,000 or $1,000,000 per year. Second, as we know from the Depression years, even accumulated savings are not guaranteed to be there when a person retires; diasters, bad investments, or personal health problems can virtually erase savings/investments through crisis. The idea that social security payments work as an effort to subsidize the ill effects of poverty for the nation by creating a cushion to eliminate basic survival needs, and to provide supplements for disabled members, makes the program one intended to cover everyone regardless of their employment situation, and by including employer payments into the system at whatever level is determined to be necessary for employers. Social security accounts are already private accounts by virtue of the fact that earnings are tracked by social security number, and estimated benefits can be determined at any point after an individual begins working. There is little reason that an employee (and/or an employer) may not choose to increase contributions to a particular employee's (or group of employees accounts) to insure a higher level of retirement benefit at retirement, thus, offering surplus contributions that are beneficial to retirees as the system is now designed, and which, over time, may offer future retirees, greater options, more flexibility, and higher "insurance" for increased earnings at retirement, or in the event of crisis. As a system that employers and employees are aleady comfortable with, assuring that the system remains intact, free from congressional exploitation, and safe for America, it remains the best way to insure that old age is not the age of beggars, the reason the system was invented to prevent.

[dave]

FYI that talk of 12.4 points is also neglecting to mention 1.8 points that are used for disability insurance not OASI. Something to consider.

[RG]

I think a flat tax would be ideal.

A flat % for SS, flat % for income, etc accross the board.

No changes in % due based on income or anything like that with the exception of people making less then 20k would not have to pay tax.

[sarah craig]

i just had to go on ssc. and i cant beleilve this crap.and they call this america the free people of all ages better wise up and smell the coffee.