Gallup: How To Save Social Security? Remove The Cap!

By Justin Gardner | Related entries in Money, Social Programs, Social Security

If you’re lucky enough to earn a lot of income, you knew this was coming. After all, you only get taxed for Social Security on the first $106,800 of your income. Anything after that draws no SS tax.

So, basically, while the rest of us get taxed on our entire income, you all pay into the system for only a very small portion of your income.

Many on the right have suggested that this would amount to the largest tax increase in history. However, it’s a hollow argument.

Let’s just look at recent history. In 1992, the top tax bracket was 31%. That increased to 39.6% from 1993 to 2001. So that’s clearly an 8.6% hike. Know the percentage that’s taken out of your check for SS? 6.2%. Pretty simple math there.

And given that Americans value folks who’ve worked hard their entire lives and should have a social safety net, they want the rich to pay their fair share.

From Gallup:

My guess is that when Social Security reform rolls around in 2013, and if Obama is elected, he’ll propose two changes. First, no more cap. Second, raise the retirement age to 60. These solutions will keep this program solvent forever. If Romney is elected, there will be no reform because he’ll seek to privatize the system and nobody’s going to go for that given the volatility in the stock market, not only in this country but elsewhere.

So, if you’re rich you have to ask yourself…is this fair? Personally, I think the cap has always been unfair, but I’d love to hear your thoughts. But before you libertarians and conservatives serve up the same arguments, let’s please just take a deep breath and realize that folks who are rich will undoubtedly stay that way even with this tax increase. They’ll just have a little less disposable income. That is literally the net effect of this. Few would move out of the country as a result of this because every other prosperous nation that you’d want to live in has similar policies.

But yes, if somebody wants to become a resident of a weird island nation that has almost no taxes, go for it. And they can suffer the scorn of everybody and isolate themselves.

So, to me, this seems like a small price to pay to make sure the other 94% have the safety net we desperately need.

But wait, there’s more!

Another graph. This one shows the number of taxpayers who are above the cap and their earnings.

Basically, the rich have been gaining more and more income, as a percentage of the whole, than the rest of us. That’s not to demonize them and, by the way, well done! You’ve figured it out. *golf clap*

But the rest of us need a backup plan and you can give up some more to make sure we’re all safe and sound.


This entry was posted on Thursday, July 29th, 2010 and is filed under Money, Social Programs, Social Security. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.

17 Responses to “Gallup: How To Save Social Security? Remove The Cap!”

  1. Eric Says:

    OK, here are my thoughts.

    When FDR crafted Social Security, he knew it would be unpopular if the Rockerfellers in the world got a big check alongside John Q. Public. Everybody who pays into SS gets a benefit proportional to what is paid in; thus, by placing an income cap, SS also caps the benefit.

    Social Security is that rare federal program where everybody receives a benefit and for richer Americans, that benefit is capped. What you (and a majority) is proposing is to fundamentally change the structure of Social Security from a retirement program to a welfare program. That is, you want to take more taxes from richer Americans but NOT increase the proportional benefit.

    FDR didn’t want this and neither should America.

    (P.S. – You meant to write “raise the retirement age to 70.” Not 60.

  2. Milo Says:

    @Eric: true that it changes the principles of the program to add a transfer component, but I think most people are OK with that (I am). It’s a rather abstract concern, versus the very practical issue of the long-term shortfall.

    But I’m vigorously opposed to the second most popular item, the means-testing. Cutting benefits to those people who manage their money carefully is a ridiculous idea. It’s literally a disincentive to save your own money for retirement, which would have terrible effects if introduced.

  3. Chris Says:

    But this would hurt the oligarchy, so I oppose it.

  4. kranky kritter Says:

    I’ve been presuming for some time that removing the cap and raising retirement age would be among the most viable ideas. I think that both of these can be gotten away with, despite a LOT of grumbling.

    Means testing would be a much harder sell, and likely to turn shrewd middle class Americans against the government, for the reason Milo cites.

  5. John Kohl Says:

    Remove the cap! Please. Why let the rich get richer and the poor get poorer? That makes no sense.

  6. Angela Says:

    Social Security is a tax, not a guaranteed retirement fund. We need to get away from the notion that because we pay the tax, we are entitled automatically to get the benefit. It is outrageous that people who are still working full-time, make a high salary, or have a lot of money in the bank, are drawing $900 to $1200 every month from social security. Many people certainly don’t like it when welfare recipients defraud the system. Indeed, the simple fact that we have welfare recipients at all, to some, is a social monetary burden. Well, having 10% taken out of paychecks (10% when you add in the medicaid) is a burden on all of us, and that percentage is going to increase eventually. To Joe Doe who makes $17/hour, 10% is a chunk of money, and then to add insult to injury, part of it is going to people who may have more money than he does.

    We should not only get rid of the cap, but benefits should be given to those under qualifying guidelines, income based guidelines.

  7. Tully Says:

    So much for the idea that SS benefits are “earned,” Angela? Heh.

  8. cranky critter Says:

    How about the idea that it is what it says it is, social security?

    I’m accepting of the idea of means testing because I think it’s the only way to provide ongoing security to those who most need it as the demographics get more difficult.

    But I am very very concerned by the moral hazard issue, IOW disincentivizing careful prudent financial choices. I had a conversation about this with a smart friend. What we came up with was the idea of means testing which factors in lifetime earnings, instead of a simple snapshot of current assets.

  9. Tully Says:

    Really? Good luck selling that. The benefits to taxes ratio of SS is already steeply progressive. Anything that makes it more so will (righteously) be assailed as turning it into a welfare entitlement that it was never meant to be. SS was conceived to be self-supporting.

    In the important field of security for our old people, it seems necessary to adopt three principles: First, non-contributory old-age pensions for those who are now too old to build up their own insurance. It is, of course, clear that for perhaps thirty years to come funds will have to be provided by the States and the Federal Government to meet these pensions. Second, compulsory contributory annuities which in time will establish a self-supporting system for those now young and for future generations. Third, voluntary contributory annuities by which individual initiative can increase the annual amounts received in old age. It is proposed that the Federal Government assume one-half of the cost of the old-age pension plan, which ought ultimately to be supplanted by self-supporting annuity plans. –FDR, Message to Congress on Social Security. January 17,1935

    That third part didn’t fly at the time, though now we have tax breaks for IRA’s and such, which at least has a little of the same flavor. We got the other two.

    When I last mentioned SS means testing as a possibility around here, it only served to get me called a tea-baggin’ right-winger. Go figure. Of course I didn’t propose we punish those who made good money and paid max SS taxes but failed to save otherwise, as I seem to gather you’re proposing. Could you elucidate?

  10. Tully Says:

    Oh, and this:

    Everybody who pays into SS gets a benefit proportional to what is paid in; thus, by placing an income cap, SS also caps the benefit.

    It’s not actually proportional, though it is scaled. Your benefit is calculated on your AIME (Average Indexed Monthly Earnings , “indexed” as in “current” dollars). You get 90% up to the first bend point ($767 in 2012), 32% for AIME between that and the next bend point ($4624) and 15% of your AIME for anything over that but under the cap. So once your AIME exceeds $767 ($9200/yr) your payback ratio falls off steeply. And once your AIME exceeds $4624 ($55,500/yr) it falls off even more. That is indeed very progressive.

  11. cranky critter Says:

    It’s not clear to me how you are defining “self-supporting.” Because it seems to me that if the total payroll taxes collected (by whatever means, methods and rates) are sufficient to fund the payouts (whatever we decide those to be), then that’s a self-supporting program.

    You seem to mean something else. What am I missing?

    Of course I didn’t propose we punish those who made good money and paid max SS taxes but failed to save otherwise, as I seem to gather you’re proposing. Could you elucidate?

    What I mean is that at the high end of incomes, your total earnings would be a factor. Don’t hammer me, because I’m making this up quickly, right now, without a ton of thought.

    Suppose you have 3 people who had the same really high lifetime income. I dunno, lets say 50 million.

    A is now without any assets.
    B now has $750 K in assets not including one primary residence.
    C now has 30 million in assets.

    A would get full benefits, so he doesn’t starve. B and C would be given the same or similar reductions or elimination of benefits. In other word, A gets help because he’l starve. But B doesn’t get rewarded for spending most of his assets by being “penalized” less.

  12. Tully Says:

    Not what I mean, but what FDR meant. Self-supporting means that the program lives on its own dedicated tax base, not on the general revenue funds. As it is already starting to do.

    In your example, all three “earned” their benefits, at income levels that would indicate they got zero rebates of their SS taxes through the EITC, and will be receiving benefits at the level they paid for them. You would punish the latter two of them to keep the first paid. I’d also point out that there are assets, and then there are liquid assets. In your examples, B falls right into the area where someone with a family farm or small business could get whacked right out of it on cash flow before they could ever collect SS, something of a back-door estate tax. Assets ≠ Income.

    Let’s also note here the max benefits at each bend point, and at the cap. AIME = $9200, benefit equals $8280/yr benefit. AIME = $55,500 = $23096/yr benefit. And at the cap AIME = $110,100 = $30156/yr benefit. To get that $2513/month top-benefit check you have to assume earning at the max for all years figured in the AIME. Note also that getting that max check means you get 3.6 times the benefit of someone who made 1/12th as much and paid 8.3% as much in taxes . In other words, there’s already some seriously progressive means-testing going into the current benefits formula. Note also that we already punish people who continue to have income over certain levels after they qualify for and start receiving SS, by taxing their benefits.

  13. cranky critter Says:

    Right, because of the payroll tax cut, it’s consuming general “revenues” right now. Would have been doing so soon regardless but the cut hastened it.

    I am sure there would have to be more sensitive details than what I tossed out off the cuff here. Our conversation (the one my friend and I had) started with a discussion of means-testing (which I recall you heaved up on the table before me, BTW, LOL)

    I agree with your general description that any means testing represents a reduction of let’s call it “your earned promise.” I get it. Thing is, reducing payouts to those with the most means is the only way to sustain it. Even if we decided to start winding it down (which I don’t think will happen anytime soon) there’d still be a gap to bridge.

    So what I am talking about here is one answer to “how do avoid punishing prudence?” That’s where we came up with the very basic idea of making lifetime earnings a factor instead of just assets.

    And yeah, not all assets are equal, I considered simply saying “liquid assets” instead of just having a primary residence exemption. My idea is no more than a very rudimentary suggestion.

    As you may recall, I don’t object to the intrinsic notion of an estate tax, which you usually like to call a death tax.

  14. Tully Says:

    Thing is, reducing payouts to those with the most means is the only way to sustain it.

    Not so. There are multiple ways to sustain the system, including raising the tax rate. The basic problem is one of demographics and over-promising on benefits. You just don’t get nearly as much revenue restricting top-end payouts as you would think, due to the already steeply progressive nature of the benefits structure.

    Even without the payroll tax cut we’d be hitting the wall about now, as the ongoing recession has boosted the ranks of those collecting rather than trying to stay employed. Especially in the disability rolls.

    And yes, it’s a death tax. I know some hate that nomenclature but it’s the correct legal term for ANY tax triggered by death, including death excise taxes and estate taxes. I’m not even necessarily against that, I’m against the state being punitively and ideologically redistributive with the even moderately successful in a fashion that actually raises little or no net revenue while causing heavy distortional losses to both society and government in the economic sense. More is spent every year avoiding the death tax than is collected by it, and it’s possible that in terms of net government revenue that the avoidance tactics cost more in other revenues than it raises. But that’s another subject, of course.

    A modest proposal to gain a few nickels: Allow people to get MediCare without collecting SS. Believe it or not, there are people of sufficient means who have tried to NOT collect their SS because they didn’t need it, but the government REQUIRES you to collect your SS to get your MediCare. How’s that for crazy and counter-productive?

  15. cranky critter Says:

    There are multiple ways to sustain the system, including raising the tax rate. The basic problem is one of demographics and over-promising on benefits. You just don’t get nearly as much revenue restricting top-end payouts as you would think, due to the already steeply progressive nature of the benefits structure.

    I should have said more. As you suggest, there are different theoretical ways to “sustain” the program. I left out my judgement that at the lower end of the income scale, many people would have real trouble handling the higher tax, especially the self-employed who pay full freight, not half.

    As to the “death tax,” we’ve beaten this horse to death before. My perspective is that it can’t be a death tax unless it applies a tax to every death, which it doesn’t. It applies a tax to estates, so estate tax is more accurate. Semantics.

    As to the flaws in the estate tax that you point out, you’re suggesting that its ineffectiveness is reason to scrap it. As with above, there are other ways to address the current flaw. We could tighten the loopholes that allow folks to evade it, especially the ones that allow folks to transfer assets to other family members so that taxpayers finance end of life care.

  16. Tully Says:

    You can argue semantics all you like, and beat your personal version as hard as you wish, but the term is 100% correct and is found in law predating the founding of the US. It applies to all forms of taxes for which death is the triggering event, including estate taxes, inheritance taxes, death duties, and stamp taxes on documents related to inheritance. (The first US gov’t death taxes were the latter: see the Stamp Act of 1797.) And when you talk about “evading” it, I would point that the difference between avoidance and evasion is 5 to 10 years in a federal penitentiary. Be very clear on that. You want real fun, examine the death taxes of the Middle Ages. They were based on the fact that the sovereign owned ALL real property, and would only allow others to keep it on the death of the current grantee by paying a tax to do so. Not a model I would wish us to follow.

    The “look-back” provisions on MediCAID-paid nursing home care are likely a lot tougher than you seem to believe. And you’re actively redirecting there — trying to change the subject. Very few people whose wealth would fall under estate taxation are going to beggar themselves to get a MediCAID-mill nursing home bed. Indeed, no one in their right mind would do so if they could possibly afford to do otherwise.

    We DO as taxpayers finance end-of-life care under MediCARE, including short-term (5 day max) respite care for hospice patients. What we DO NOT finance under MediCare is long-term nursing-home care other than for required rehab services. No evasion or asset-shifting required. If you’d like the official info on that, go here. [PDF]

    And no, I did NOT suggest the death tax be scrapped. I explicitly said I wasn’t necessarily against such taxes, but suggested that in its current form it’s pretty worthless as to raising overall net government revenue due to obvious adverse effects associated with the structuring of the tax that suck OTHER revenues right out of taxation in the course of planning to avoid it. That’s a demonstrable empirical fact of revenue economics, not an opinion. Both direct revenue losses in other areas and economic distortions.

    All of which is digression induced by your insistence on diversion. My observation was that means-testing SS wouldn’t cover very much due to the alread steeply progressive nature of the benefits structure, and I suggested that we should at least allow people who did not need there SS benefits to opt out without losing their MediCare. Comments on that? Observations?

  17. cranky critter Says:

    If death were truly the triggering event, then everyone who died would have to pay the tax. That’s not semantics. The tax currently in question is known as the estate tax, and that’s a more accurate term.

    If you’re impressed by the previous usage of a less accurate term on some occasions, good for you.

    The “look-back” provisions on MediCAID-paid nursing home care are likely a lot tougher than you seem to believe. And you’re actively redirecting there — trying to change the subject. Very few people whose wealth would fall under estate taxation are going to beggar themselves to get a MediCAID-mill nursing home bed. Indeed, no one in their right mind would do so if they could possibly afford to do otherwise.

    You’ve explained the basics of this before. Thanks. Good to know. Notwithstanding, any reading of the marketing of the basics of estate tax avoidance involves accounting for the look back periods.

    You obviously know a lot more about the details than I, so I won’t pretend to be able to have a discussion on the matter as though I was as well informed. As you suggest, surely folks aren’t going to knowingly beggar themselves to poor care. But it does seem that folks are in some or even many cases getting information from lawyers along such lines, and some are acting on it. I’m really only talking about a very general and basic idea, which is that I’m not a fan of estate tax avoidance, especially not if there’s any way that it concurrently puts taxpayers on the hook.

    All of which is digression induced by your insistence on diversion.

    Really? I can’t follow up on multiple ideas in a lengthy exchange? The subject is what YOU say it is? You’re a peach. What crawled up your @ss?

    FWIW, I’m not for means testing because I think it’ll capture all the extra dough we need. It’s more like this: if we look at all the dials and make estimates of which ones we can turn, and by how much, you come to the conclusion that means-testing needs to be part of the solution. I recall you’ve said elsewhere that you favor it.

    I’m fine with people opting out of their SS payments without losing medicare eligibility. My first impression is that I wonder what percent of folks would choose to do this. The other thing I wonder about is whether medicare would eventually need to require means-testing to prolong its nominal viability.

    After all, we both know that with current demographic trends eventually you reach a point of inputs versus outputs where no level of “progressivity” can keep things going. So either the demographics change, some unforeseen advancements occur, or we have to wind down the progressive pay-go system in a democracy.

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