Fixing Social Security

Some pundits on the left see an easy solution; simply remove the cap on wages subject to the Social Security payroll tax. As you can see below [Note 1], according to the Social Security trustees, that doesn’t solve the problem and in the process it imposes an additional tax burden, not on the wealthy, but on upper middle class Americans. Reducing the income for people who have money to spend has consequences. 

Look at it this way, during the recession the Social Security payroll tax was lowered to stimulate the economy. Don’t you think raising it by 6.2% on pay over $117,000 will have the opposite impact?  In addition, as you can see in the Note below, to have any significant impact on the Social Security deficit, the ultimate monthly benefit would not be based on these higher contributions, but on the standard cap thereby turning Social Security into another massive welfare program something opposed by President Roosevelt when Social Security was proposed. 

Keep in mind that the very wealthy, the 1% if you will, don’t earn income from wages, their wealth comes mostly from growth in investments. Sooo, removing the wage cap for Social Security taxes hits the upper middle class, the union worker with a lot of overtime, the salesman who has a good year, the college professor, the superintendent of schools, your primary care physician, even some police officers who work shifts or OT. 

Income subject to payroll taxes includes:

Wages subject to federal employment taxes generally include all pay you give to an employee for services performed. The pay may be in cash or in other forms. It includes salaries, vacation allowances, bonuses, commissions, and fringe benefits. It does not matter how you measure or make the payments. Amounts an employer pays as a bonus for signing or ratifying a contract in connection with the establishment of an employer-employee relationship and an amount paid to an employee for cancellation of an employment contract and relinquishment of contract rights are wages subject to social security, Medicare, and FUTA taxes and income tax withholding. Also, compensation paid to a former employee for services performed while still employed is wages subject to employment taxes.

Do you believe Social Security should be a welfare program? Do you believe that your retirement income should be funded through the taxes paid by other working Americans?

[NOTE 1] According to the 2014 Social Security Trustees’ report, the 2013 OASDI 75-year actuarial deficit amounted to 2.88 percent of taxable payroll ($10.6 trillion). The Social Security Administration estimates of payroll tax reforms had projected that eliminating the tax cap in 2013 without increasing benefits would have reduced the 75-year actuarial deficit by 86 percent, to 0.37 percent of taxable earnings. The estimated $1.3 trillion in remaining deficits is calculated by multiplying the 86 percent ratio by the 2013 deficit of $10.6 trillion, and then subtracting that figure from $10.6 trillion to get the remaining imbalance. This same method is used for all reform estimates contained in the 2013 Social Security Administration report on Payroll Tax Rates. Social Security Administration, “Provisions Affecting Payroll Tax Rates,”