Highly popular among Social Security status quoists is the idea of eliminating the cap on earnings that are subject to FICA tax. At present, only the first $90,000 of wages is subject to the 12.4 percent levy (half on the employer, half on the employee) that “funds” Social Security retirement benefits. The cap, originally $3,000 (just under $40,000 in current dollars), is indexed to the increase in average wages. (Social Security Online has further information.)
The reason why wages in excess of $90,000 aren’t taxed is that they are not taken into account in computing benefits. If the cap were simply eliminated, without any other alteration in the system’s structure, high earners would see their entitlements rise with their taxes. They wouldn’t break even, because the benefit formula is heavily weighted toward workers with low lifetime earnings, but the long-term effect on Social Security finances would be far less favorable than the advocates of unlimited FICA assume.
If, on the other hand, the cap were removed for taxes but not for benefits, the measure would be nothing but a large increase in the marginal tax rate on earned income. The highest tax bracket would go up de facto from 35 to 47.4 percent. That would, of course, delight the “soak the rich” crowd and would be comparable to the marginal rate hike that Bill Clinton pushed through in 1993 (from 28 to 39.6 percent). We can leave till another time arguments about whether it would be good for the economy.
For present purposes, it is sufficient to observe that the boost would not improve the health of Social Security in any substantive way. The current surplus of Social Security taxes over benefit payouts would be enlarged; the extra money would, as now, be used to pay the government’s other expenses; eventually – a few years later than now projected but no less inevitably – money would have to be found to meet benefit commitments. At that point, the choices would be unchanged: renege on the promises, raise taxes, cut other expenditures, or borrow money. Those who moan that private accounts are “risky” should reflect on the risk that a future electorate will decide that reducing benefits is the most palatable alternative. Perhaps our descendants will not even be willing to keep payroll taxes at the level decreed by the present generation. Private property is safeguarded by the Constitution and deeply ingrained American traditions. Government pledges rest on rather shakier foundations. Raising taxes today will not make them any more reliable.
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