I will be on Mark Thompson’s Make It Plain show on Sirius/XM – I’m actually on every Friday – and we tape early, so I can tell you that one of the things I’ll talk about is how Social Security’s long-term funding is an artifact of rampant US inequality. See, we have a payroll tax funding Social Security that gets capped at around $113,700 a year. That means that every dollar above that cap gets untaxed to pay for Social Security. When inequality widens, as it has, more and more compensation goes untaxed, draining the Social Security system of funds. Historically speaking, at least 90% of compensation gets captured by the Social Security system. Today that’s down to about 82%, the last I read.
So to the extent that Social Security needs to be fixed – and by “fixed” I don’t just mean brought into a 75-year balance, but made more adequate so less seniors slip into poverty – you need to raise that tax cap and capture more income. Sen. Mark Begich (D-AK) has an excellent piece of legislation that would do just this.
• Increases Benefits for Seniors and Persons with Disabilities. Currently, Social Security benefits are adjusted by the Consumer Price Index for workers. However, costs and spending patterns for seniors do not mirror those of the workforce. That is why Sen. Begich’s bill calls for adjusting cost-of-living increases with a Consumer Price Index specifically for the elderly which was created to more accurately measure the costs of goods and services seniors actually buy.
• Lifts the Cap on High-Income Contributions. Current law sets a cap based on income at $113,700 for paying into Social Security. If an individual’s wages hit that total for the year, they no longer pay into the program. Sen. Begich’s bill lifts the cap and asks higher income earners to pay Social Security on all their earnings in order to increase the program’s revenue stream and extend the overall solvency of the program.
• Extends Social Security for approximately 75 years through modest revenue increases gradually implemented over the course of seven years
If you lift the cap, in other words, you don’t just bring the program into balance, but you can adjust the system so it adequately reflects senior costs and pays out in a manner to cover them. This will be a tremendous boon at the low end of the scale, and in a country with virtually no other retirement mechanism anymore, it’s practically vital. Keep in mind that fiscal scolds want to use the chained CPI to calculate cost of living increases, even though the current calculation undercounts senior needs. That’s a benefit cut, and switching to CPI-E (the consumer price index for the elderly) would be a needed benefit increase.
Liberal squish Kevin Drum attacks this as a big tax increase on the rich. Um, yes. And those same rich have received 93% of all the income benefits since the Great Recession. They have grown so rich relative to the rest of the country that they have seen wide swaths of their income exempt from the payroll tax. For a more equitable society, we need to capture that money at the top to fund the system.
Drum says that imposing a large tax increase on the rich for the purposes of saving Social Security is a “waste.” Of course, we just learned that Social Security, according to the US Census Bureau, is the greatest anti-poverty program in the country, responsible all by itself for lifting 8% of the population out of poverty. Because this is still not enough to prevent 15% of seniors from slipping into poverty, we should take this excellent, successful transfer program and augment it, ensuring a decent retirement for everyone in this country. I don’t consider that a waste.
UPDATE: Somewhat related to this is the innumerate Stephen Moore point that the rich “pay a higher share of taxes” after the Bush tax cuts. Yes, that’s because they captured a higher percentage of compensation. Inequality matters in these debates, and it’s good to see a lawmaker actually address that.
UPDATE II: If you really had reservations about the impact of tax rises with this plan, you wouldn’t remedy that by setting the cap at the top. You would exempt the cap in the middle, or better, exempt the LOW END of income. The former was Barack Obama’s “donut hole” plan for Social Security – lift the cap, but continue to exempt income between $110,000 and $250,000. This was really done to hold to his pledge not to raise taxes above that $250,000 marker, but it also shields tax rises from those who would feel the most hurt from a payroll tax increase, while giving back very little funds that would enhance the system. The better option is to lift the cap and exempt as much of the first-dollar income you could while also enhancing the system and keeping it in relative balance. You could maybe exempt the first $10,000 of income this way, which would amount to a big wage subsidy to those who need it, while those who could afford it pay the rest. (Everyone would benefit from that first $10,000 exemption, of course.)