February 18, 2005
FLICKING THE THIRD RAIL:
Tricky politics of Social Security: Seeking support for his plan, Bush ruled out a rate increase, but not a higher cap on taxed income. (Linda Feldmann, 2/18/05, The Christian Science Monitor)
At a press conference Thursday, Bush specifically ruled out an increase in the Social Security tax "rate," but didn't rule out any other measures to address the program's eventual shortfall."We welcome any idea, except running up the payroll tax rate," the president said. Earlier this week, he suggested for the first time that he would consider raising the cap on income subject to Social Security tax, currently at $90,000.
Most Americans - 81 percent in last week's Washington Post poll - support that idea. But to the president's conservative base on economic issues, the idea represents a tax increase and is therefore anathema. [...]
The salary cap - and the controversy surrounding changing or removing it - stems from philosophical underpinnings that go back to Social Security's creation under President Roosevelt in 1935. The system is considered to be a social insurance program first and foremost, and only partly a progressive vehicle to redistribute income. Since there is a cap on what any individual will be paid in benefits during retirement, there is also a cap on how much of any individual's wages can be taxed. This also explains why unearned income - from stocks, bonds, and the like - is not subject to Social Security tax.
This year, the cap on wages subject to payroll taxes is $90,000. It was $29,700 in 1981 but has been adjusted upward each year since then according to the gain in average wages. Back in 1981, some 90 percent of wage-and-salary earnings in aggregate were subject to the payroll tax.
But since then, the distribution of wages in the nation has shifted toward those in upper brackets. So only 85 percent of all taxable wages are subject to the payroll tax today. To restore the coverage to the 90 percent level, the cap would have to be hiked to $138,000. Such action would close about one-third of the 75-year gap that Social Security actuaries foresee between tax revenues and benefit payments.
Sen. Lindsey Graham (R) of South Carolina has been proposing a hike in the cap during the current discussion of changes in Social Security.
One other alternative being discussed would be to remove the cap entirely, as has happened with the payroll tax for Medicare. That would close the 75-year gap further.
Besides getting rid of the cap on earned income, eligibility for benefits should be means-tested and the retirement age raised. The additional moneies would not only fund the transition to personal accounts but help fund accounts for those in poverty. Posted by Orrin Judd at February 18, 2005 7:59 AM
I can't go along with means-testing, but raising the cap to $140,000 seems OK. Raising the retirement age to 68 or 68.5 is a good move, too. I suspect there will be a big fight if a higher limit is suggested, especially if the gap between that age and the age when people actually retire continues to widen. I can see the 62 year-old retirees clamoring for more per month.
Meanwhile, Mel Watt should be *****-slapped for his little performance yesterday (when Greenspan testified). It is long past time to smite the hackneyed members of the black caucus who do not want to help their supposed constituents.
Posted by: jim hamlen at February 18, 2005 11:04 AMIf someone could explain why it's a good idea to raise the top marginal tax rates on earned income by 12% for everyone in the current 33% and 35% brackets and a lot of people in the 28% bracket, I'd appreciate.
"Soaking the rich" and "political tradeoff with the economic ignorami who yearn to soak the rich" are the two explanations that leap immediately to my mind.
Posted by: Random Lawyer at February 18, 2005 12:47 PMRandom:
Why should all my income be taxed and not theirs? You can't soak the poor, or we would.
Posted by: oj at February 18, 2005 1:46 PMIsn't Buffet's salary $100K?
Posted by: Sandy P at February 18, 2005 2:29 PMBecause massive hikes in the top marginal tax rates tend to shaft the people who own the businesses that might want to hire you? Because it would be nice if we could pull this "reform" stuff off without crashing the economy?
Besides, all their income is taxed.
Posted by: Random Lawyer at February 18, 2005 3:59 PMThey pay more total dollars than I do (unless they have more effective tax planners than I do, which is very possible) and they pay the same or higher marginal rates on every dollar above what I make. How is their income taxed less than mine?
A system of decreasing marginal rates would be preferable to the current system of increasing marginal rates. A 0% rate at the very top would be ideal.
Posted by: Random Lawyer at February 18, 2005 4:31 PMBecause we escape the SS taxes once we reach the cap, while every dollar you make is hit.
Posted by: oj at February 18, 2005 4:34 PMRaising the cap on SS taxes (above 90,000), means you would have to also raise the benefit for all people affected. This would largely offset the positive impact of higher tax revenue.
The only alternative would be to limit or eliminate the benefit to higher income workers by use of 'means testing'. How many people earning over 90,000 would be willing to pay more while simultaneously being targeted for lower benefits because they are 'rich'?
Posted by: Kurt Brouwer at February 18, 2005 4:58 PMMy husband owns his own bus - both sides.
Talk about double whammy.
Posted by: Sandy P at February 18, 2005 5:30 PM