Eliminate the Cap, Solve Social Security’s Financial Problems?

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By on December 11, 2018 in Retirement with 0 Comments

Social Security card partially obscured from being underneath a scattering of coins

This is the second part of a series on peak-revenue in Social Security. Part 1 looked increasing the payroll tax rate, and now I provide analysis on changing the taxable wage amount.

There is nothing like platitude to stall progress. It provides one the sense of morality without the trouble of thinking. In terms of Social Security, the morality play is the phrase “Eliminate the cap – problem solved”. It is an internet meme that has taken on a reality of its own. 

The slogan has two basic problems. First, it isn’t true. Second, it isn’t a good idea. 

While the phrase may be found on the internet a lot, no expert believes that eliminating the cap will solve the problem. About the most favorable assessment comes from the Social Security Administration (“SSA”) which estimates that this policy option would resolve about 2/3rds of the solvency shortfall. Moreover, the SSA believes that this approach will not create solvency even if the program does not accrue credits for these earnings.

Just a bad idea

Efficacy aside, it is just a bad idea. 

Social Security is a progressive system by design where people who earn more pay more for their benefits. This reality is well documented in the Urban Institute updated projections on the lifetime benefits and costs of Social Security and Medicare, (see Social Security and Medicare Lifetime Benefits and Taxes).

It is estimated that a man retiring in 2020 earning the maximum taxable income will pay $710,000 while only expecting to collect $512,000 over his lifetime. That is before taxes which may reclaim a 1/3rd of the workers benefits in retirement. Essentially, $200,000 of the person’s payments is expected to stay in the hands of the system distributed to someone who has put in less.

Generally people look at this payment in one of three ways. Some will tell you that the man paid $710,000 in taxes. Others will tell you that the man paid $710,000 in insurance premiums, and the $200,000 is simply the statistics of not living long enough. 

I am going to tell you that the $200,000 is the tax. It is money paid that statistically he will never collect.

FDR’s Design

However you look at payment, you have to understand that general tax revenue is toxic for Social Security because every such dollar comes at a political cost of not paying for other things. If you want to end Social Security, the first thing to do is make it heavily dependent upon cash from the general fund. 

This isn’t just my opinion. It was the opinion of FDR, who said, “Social Security, except for the money necessary to initiate it, should be self-sustaining … funds should not come from the proceeds of general taxation.” And yet, he founded the system based on the payroll tax. There must have been a difference in his mind.

FDR reasoned that the payroll tax was more like an insurance premium, paid for by the individual for the benefit of the individual. He wanted workers to have a legal, moral, and a political right to benefits. 

With this structure in place, Social Security was conceptually an insurance company run by the government, rather than a welfare program. FDR didn’t want people like Senator Sanders or Senator McConnell deciding who does and who does not need benefits (see FDR’s comments.)

FDR didn’t want people asking these questions

According to the SSA, eliminating the cap would generate about 8 trillion over the next 75 years. It is difficult to imagine that younger workers would not have some priorities that they feel compete well with Social Security. They are going to ask, “How do you justify a welfare program for which 1/5th of our poorest seniors are not eligible when it pays Senator Sanders and his wife more than 50K per year? How do you support a government program which pays at times wives 50 percent of what it pays men?”

To illustrate, I am approaching retirement, and fully believe that Social Security will define my future. I have no desire to stabilize the program in the near term by removing the cap today because I am fairly confident that future voters will change the allocation of payroll taxes over time to pay for their priorities long before I depart the system. I don’t believe that voters will subsidize a system which takes money from those in poverty, and giving it to people not remotely close to poverty. 

Not FDR’s baby anymore

It is possible to argue that the program has changed since FDR. It has, and it does now, collect general fund subsidies. You could argue that voters have seemed tolerant of the growing support over the years 

I think the argument fails to acknowledge the growth in the visibility of the cost. The program is on pace with consuming more than 6 percent of the nation’s GDP, which is roughly a 50 percent increase from the 2005 – when we started to phase in higher retirement ages. 

Just my opinion, eliminating the cap does not solve the problem. It creates a new one.

© 2019 Brenton Smith. All rights reserved. This article may not be reproduced without express written consent from Brenton Smith.

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About the Author

Brenton Smith (A.K.A. Joe The Economist) writes nationally on the issue of Social Security reform with work appearing in Forbes, FedSmith.com, MarketWatch, TheHill.com, and regional media like The Denver Post.

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