I oppose the proposed deletion in 2023 of the $160,200 cap on remuneration subject to the 12.4% payroll tax rate paid to employees Social Security.
Dating back to his earliest days in the Franklin Delano Roosevelt administration, Social Security was designed with two objectives in mind: 1. to enable the lowest paid workers, without access to insurance, pensions and retirement accounts, to prepare for their retirement and to insure themselves with dignity against premature death and invalidity; and, 2. encourage labor effort, particularly at prime working ages. It does this by linking retirement, disability and survivor benefits to an individual’s lifetime earnings.
Although there is some redistribution from the higher paid workers to the lower paid workers, so that proportionally the lower paid workers derive more from their taxes paid, Social Security is decidedly not a welfare program in its design and official description. Eliminating the earnings ceiling would further reduce the link between earnings and benefits. This would be politically detrimental to the program and discourage work.
In particular, the imposition of a massive tax increase – 12.4 percentage points – on the incomes of around 10 million highly productive, mostly middle-class workers earning more than $160,200 would have several significant consequences. This would reduce their support for the program, strongly discourage their participation in the workforce, and encourage the avoidance of payroll taxes by converting earnings into incentive stock options and other forms of employee stock ownership.
It would also provide them with unnecessary additional benefits. Most of these workers enjoy broad, often employer-subsidized access to pensions, retirement accounts and insurance. The ability to avoid tax would introduce an element of unfairness because higher paid workers, such as corporate executives and professionals, would find it faster and easier than well paid employees in government, organizations to non-profit and mid-level companies to substitute employee ownership for stock. wages. In many cases, these workers would have their wages taxed at the federal, state and local levels at rates in excess of 70%.
The reality is that most Americans who earn more than $160,200 are not really rich, especially if they live on the coasts, have a large family, or have high education or health expenses. Many would struggle to bear the heavy additional tax burden if the cap were removed.
Over time, the volatility of personal income also makes such a large tax increase unfair. Many workers receive high incomes temporarily or at the end of their career. According to Social Security Administration, although about 6% of workers earn above the taxable maximum, nearly 20% of current and future covered workers are expected to earn above the taxable maximum in any given year. Therefore, taxing above the current maximum does not mean seizing the income of only workers with very high lifetime earnings. Furthermore, many of these high-income workers have already been exploited in recent years, with large tax increases going to Medicare and paying for the Affordable Care Act.
Even with the most draconian version of this proposal, where the tax cap is removed but no additional benefit results, and the additional money goes to Social Security, revenues would be well below the amount needed to sustain the program at current benefit levels. According to Congressional Budget Officeinitially only about two-thirds of the annual shortfall would be made up, decreasing to half in subsequent years.
Advocates who think this change is an easy way to avoid further curriculum reform are wrong. Moreover, they ignore the plight of federal finances, which are rapidly deteriorating even outside of Social Security increasing demands on resources; and which will either require program cuts, or more revenue, or a combination. If more revenue is the goal, where will it come from if we have already increased Social Security payroll tax rates of 12.4 percentage points for middle and upper class workers?
There are many reasonable and fair ways to get solvent Social Security program without increasing payroll taxes. These reforms reflect a modern economy, society and labor market, as well as new ways of saving for retirement, while preserving the original objectives of the program.
Mark J. Warshawsky is the Searle Scholar at American Institute of Enterprise. He previously served as Assistant Secretary for Economic Policy at the Treasury Department and Deputy Commissioner for Retirement and Disability Policy at the Social Security Administration. He wrote this for InsideSources.com.
