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Raising Tax Cap Explored as Way to Close Social Security Gap

The possibility of raising the cap on payroll taxes may help to close the Social Security gap, but the option could pose other problems. Business correspondent Paul Solman examines both sides of this proposed solution.

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  • , Ms. Leblanc, since you went to the trouble of dramatically reenacting your e-mail for us, the least we could was look into your question:, we thought, than here:, say, $150,000 by using a different index would solve more than half the problem. But such calculations beg the question:, then, from our man in the van and the freshly minted MBA in the back row:, is exactly this:, and most Americans, don’t seem to buy the arguments against raising the cap, they may have to acknowledge one made by economist Zeldes:, it turns out that raising the cap to $150,000 today would get us back to the historical average:

    PAUL SOLMAN: Earlier this year, we produced two stories on ways to close the projected Social Security funding gap, discussing them with young working students at a Boston community college.

    One way was to raise the retirement age; a second, to decrease benefits. We explained and then took votes. The proposals were rejected resoundingly. But there was another response.

    GENEVIEVE LEBLANC: I always enjoy Mr. Solman’s features.

    PAUL SOLMAN: We got a fair number of viewer e-mails, including several like this one.

    GENEVIEVE LEBLANC: I hope you have another segment on the possibility of raising the cap at which we stop paying the tax. Sincerely, Genevieve Leblanc, Eugene, Oregon.

    PAUL SOLMAN: Well What about closing the funding shortfall by lifting the cap on income subject to Social Security taxes?

    And where better to ask about caps Commencement at Columbia University, where the typical graduate is likely to out earn the income cap eventually, and graduating MBAs, according to last year’s numbers, will start out-earning the cap right away with an average starting salary of — get this — $143,682 a year.

    So we rounded up a group of MBAs and their parents for a mini-symposium with economist Stephen Zeldes, an expert on the financing of Social Security.

    STEPHEN P. ZELDES: Right now, you pay 12.4 percent of earnings up to a cap of $90,000. That is split between employee and employer, but no taxes are collected on any earnings over $90,000 per person.

    PAUL SOLMAN: Now the income cap on the payroll tax has risen slowly since 1982, indexed to average earnings. If earnings continue to rise, as in the past, the cap would rise but not nearly enough to keep pace with projected Social Security benefits.

    Removing the cap entirely, thereby imposing a flat tax of 12.4 percent on all earnings – essentially a $100 billion a year tax increase on the wealthy — would more than completely close the funding gap.

    Even lifting the tax cap today to Why was there a cap in the first place? Well, Social Security was controversial when it was first created. President Roosevelt was careful to sell it as insurance, not welfare.

    PRESIDENT ROOSEVELT: We can never insure 100 percent of the population against 100 percent of the hazards and vicissitudes of life, but we have tried to frame a law, which will give some measure of protection to the average citizen and to his family against the loss of a job and against poverty-stricken old age.

    PAUL SOLMAN: But to some of the wealthy, this must have sounded like welfare, which their Social Security taxes would be paying for. To get them on board, an upper limit was placed on income subject to the Social Security tax.

    Can I just ask you one quick question? Can you just put him on hold for just a second?

    MAN: OK.

    PAUL SOLMAN: To most people though, at least on and below the sidewalks of New York, raising the income tax cap on Social Security seemed an obvious solution.

    MAN: There shouldn’t be a cap on it. Everyone should pay. Up as high — as long as you’re making the money, you should have to pay on it.

    WOMAN: That makes a lot of sense.

    MAN: Yes, of course, because then it would help the lesser person.

    WOMAN: I’d be in favor to lift it.

    MAN: It’s just a tiny, little bit that richer people have to pay and they won’t feel it.

    PAUL SOLMAN: So if you made half-a-million dollars a year, you think you wouldn’t mind paying an extra $50,000-$60,000 for Social Security?

    MAN: So that all the people can be safe? Yes, I wouldn’t mind.

    PAUL SOLMAN: Now most of those we spoke with probably made less than $90,000 a year. Maybe class resentment was a factor here. And, of course, we were in New York, perhaps the bluest city in the bluest state.

    But a CNN/USA Today/Gallup poll in February, found that two-thirds of Americans supported applying a Social Security tax on all income. And at Columbia, folks who’ll obviously be affected by a rise in the tax cap, supported it almost as enthusiastically as those out on the street.

    PAUL SOLMAN: How many people are in favor of at least raising the cap to $150,000? There was, however, an articulate holdout.

    ADRIAN JONES: Certainly you can’t tax just a tiny portion of the people to get yourselves out of this problem.

    PAUL SOLMAN: You can. You mean you shouldn’t.

    ADRIAN JONES: But — correct. I’m not a part of that population right now, but…

    PAUL SOLMAN: But you hope to be.

    ADRIAN JONES: I hope to be, yes. Between now and 2045, I hope to have a few years where I’ll be in that part of the population.

    PAUL SOLMAN: So, it turns out, does one of our dozen or so interviews out on the street.

    PAUL SOLMAN: You want there to be a ceiling?

    MAN: Yeah.

    PAUL SOLMAN: Because maybe you’ll be making that kind of money, yes?

    MAN: Almost.

    PAUL SOLMAN: An important reminder Some people hope they are going to be wealthy and think the American dream involves not being penalized for it.

    COLUMBIA GRADUATE: That’s what makes the country great, is that we’re all optimistic and that we think that we’re going to reach that bracket, whether we make it or not.

    PAUL SOLMAN: Everybody thinks they’re that fellow up there and it’s a good thing they think that?

    COLUMBIA GRADUATE: Everyone strives to be what that guy hopes he will be.

    ADRIAN JONES: I feel a little bit less isolated now.

    PAUL SOLMAN: Reminiscent of President Roosevelt’s worries about alienating the wealthy, there were two other arguments against raising the income cap without raising benefits commensurate with the higher taxes.

    JAY WEISS: A, I think it’s unfair, and B, I think it’s going to create an incredible incentive for people to find a way to beat that system. What you are describing is a system where the person pays in and gets nothing back at the end on that level there, and I think that’s where you’ll lose people.

    STEPHEN ZELDES: One of the reasons that even the Democrats are concerned about breaking the link between contributions and benefits is That they’re worried about losing the political base for Social Security.

    PAUL SOLMAN: Of course fairness is in the eye of the beholder, as even people who’d probably be subject to the increased taxes were at pains to point out.

    MICHAEL ROBINSON: If one is a teacher, a fireman or a police officer, all your income is going to be under the Social Security tax. But if you’re a managing director at Goldman Sachs and so on, only a very small percentage of your income is going to be under that tax.

    PAUL SOLMAN: So, I mean his notion of fairness, in other words, is it’s not fair that you make a million dollars a year and you only pay Social Security taxes on $90,000 of it. Whereas if you made $50,000 a year, you’re much closer to the bone and you’re paying taxes on…

    MICHAEL ROBINSON: Everything you earn. Everything you earn.

    PAUL SOLMAN: Moreover, high earners get a lot of their income not from pay, but from investments on which there’s no payroll tax at all.

    GINA GELD: You don’t have any Social Security on stocks, bonds, capital gains, etc. And a lot of the higher income individuals got a substantial tax break under this administration. So we have already given benefits to the people who are in the higher brackets.

    PAUL SOLMAN: But wait a minute. What if we raised the cap on payroll taxes, and at the same time hiked Social Security benefits for high earners?

    MICHAEL ROBINSON: I’m fine with the benefit adjustment for people who are rich.

    PAUL SOLMAN: And you think that’s fair?

    MICHAEL ROBINSON: Yes.

    PAUL SOLMAN: And you think that’s not fair?

    ADRIAN JONES: If you got benefits on the full, one point, you know, however many million, and if those benefits were, you know, level with what other people get in their benefits, then it might be more acceptable.

    PAUL SOLMAN: But even if most of these folks That taxing the rich could have unintended economic consequences. Such as:

    STEPHEN ZELDES: That people supply less labor. They work less because more of their labor income is being taxed. So there’s a disincentive, perhaps, not to work as much.

    PAUL SOLMAN: And a disincentive for employers to hire workers making more than $90,000 a year since employers pick up half of the payroll tax tab.

    ADRIAN JONES: Yeah, absolutely. I mean, if you raise the costs to employ someone, then you’re going to have fewer people who are going to be employed.

    PAUL SOLMAN: At the end of the day, there were, as usual here on the NewsHour as in life, arguments on both sides of the debate over raising the cap on payroll taxes.

    But there’s one final point to make and it concerns the trend toward income inequality. That is: High earners have been reaping almost all the economic gains of recent years, yet those gains haven’t been shared with Social Security.

    As folks at the top earn more and more, Zeldes explained with slides, a growing share of total U.S. income is exempted from payroll taxes.

    STEPHEN ZELDES: It’s now 15 percent. It used to be 10 percent.

    PAUL SOLMAN: And this trend is exacerbating the looming shortfall in Social Security. I’ve read people saying the fact that so much of the money is now exempt from Social Security taxes is part of the reason Social Security is under-funded. Is that true?

    STEPHEN ZELDES: Yes. The greater the growth of wages of those under the Social Security earnings cap, the less of a problem we have moving forward for Social Security.

    PAUL SOLMAN: How to get more wages under the cap? Well Taxing 90 percent of total U.S. wages instead of only 85 percent as we do right now.

    It’s a proposition our very non-random New York sample seemed to favor, but perhaps because it would raise taxes on the highest American income earners and give them an incentive to oppose or evade the Social Security system, it’s a proposition that hasn’t seemed to find much favor in the world of politics.

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