To fix Social Security, just add more money
Raising the taxes on higher wage earners is the solution to the problem that isn't being mentioned.
By HELEN HUNTLEY
Published February 17, 2005
Shoring up Social Security doesn't have to be complicated. One of the most popular potential fixes is also one of the simplest: Tax more income.
"If someone is making a million dollars, why not make them pay tax on the full million?" said Craig Valchine, a Tampa lawyer.
It's a popular sentiment. In a CNN/USA Today/Gallup Poll this month, 67 percent said it was a good idea to require workers to pay Social Security tax on all their income. In another recent poll, the idea registered 69 percent approval.
Currently the Medicare portion of the payroll tax applies to all earned income, but the Social Security portion applies only to the first $90,000. As a result, those million-dollar CEOs and ballplayers pay more in Medicare tax than they do in Social Security tax even though the Social Security tax rate is higher: 6.2 percent vs. 1.45 percent for both employer and employee.
When Social Security began, the tax applied only to the first $3,000 of income. Congress periodically increased the income cap and it is now adjusted automatically each year based on the increase in the average wage. At one point Congress decided it wanted to tax 90 percent of all earnings by U.S. workers. However, the current coverage level has fallen to about 84 percent because earnings at the top have risen faster than average earnings.
In a 2001 report, a bipartisan Social Security Advisory Board created by Congress and appointed by the president looked at the issue of raising or eliminating the earnings cap. It found that lifting the cap for tax purposes but not increasing benefits for those high-income workers as a result would eliminate the entire shortfall between taxes collected and benefits owed. A less drastic approach, allowing the higher wages to be considered in benefit computations, would cure 88 percent of the problem.
The board also considered simply raising the cap rather than eliminating it. Phasing in the 90 percent standard would be a 37 percent cure, it said.
Others have suggested caps of $140,000 to $200,000. The AARP says gradually increasing the cap to $140,000 would reduce the projected shortfall by 43 percent.
Another compromise proposal would require workers to pay tax on all their income but limit the increase for the employer's share of the tax.
While President Bush has said he is against any increase in Social Security taxes, he has not specifically ruled out an increase in the cap.
Valchine says he supports lifting the cap even though it would require him to pay more.
"As much as I don't want to pay the extra taxes, it's just what I believe to be a fair concept," he said.
And he gets support from some other high earners.
"We need to get to the point where we define Social Security as a tax we pay to keep our parents from moving back in with us," said Jade Moore, executive director of the Pinellas Classroom Teachers Association. "It's the basic Christian concept of taking care of widows, orphans and disabled. We're lucky to make the kind of money we do."
Of course not everybody thinks removing the cap is a great idea.
Clearwater lawyer Tim Johnson says he is willing to pay more, but thinks raising the cap is more appropriate than removing it.
"The pain needs to be shared," he said. "There needs to be sacrifice by everybody in order to cover this gap that appears to be looming on the horizon."
The conservative Heritage Foundation put out a report in 2001 saying removal of the cap would do more harm than good. Among other things, it said it would reduce job creation, hurt economic growth and discourage private retirement saving.
The report also noted that removal of the cap would create an even bigger incentive to shift income to reduce payroll taxes. Many self-employed people already do that by setting up their businesses as S corporations. They take modest salaries and then get the rest of their compensation as dividends not subject to the Social Security tax.
--Helen Huntley can be reached at huntley@sptimes.com or 727 893-8230.