Normative Narratives

Economic Outlook: Funding The Social Security Trust Funds

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Social Security reform always receives a lot of attention from politicians on both sides of the political spectrum. On one hand, we cannot continue to finance future social security obligations with our current system. On the other hand, privatized retirement plans are susceptible to market fluctuations, and therefore make poor backstops for retirement. Perhaps we can shore up Social Security Funds by lifting the social security “cap”, and limiting benefits to those who truly need them:

Under Social Security’s “Old-Age, Survivors and Disability Insurance” program, an annual limit based on changes to the national average wage index determines the maximum amount of taxes that can be taken out of an individual’s salary for Social Security.

For 2014, the cap is 6.2 percent of $117,000, or a little over $7200. Once that amount has been reached, an individual has satisfied the annual requirement and will no longer pay into the country’s Social Security trust fund.

There are 9.63 million U.S. households with a net worth of $1 millon or more, according to a recent study by financial firm Spectrum Group. Many will reach the tax cap before the majority of working-class Americans.

“Most workers have Social Security contributions withheld from their paychecks every week for 52 weeks of the year,” said Nancy Altman, co-director of Social Security Works. “If you’re a millionaire, you stop paying right around now. For someone like Warren Buffett, you’re done paying Social Security taxes in January.”

When the cap was established in 1937, 90 percent of annual salaries were subject to paying Social Security tax year round.

But in recent years, pay has risen faster for wealthy Americans than it has for the working class. In some instances, workers have seen their salaries decrease. Today, only about 70 to 75 percent of annual salaries are subject to paying the tax year round.

Marilyn Moon, senior vice president of the American Insitutes for Research, said that the Social Security tax cap will eventually need to be lifted in order to keep the system afloat.

It’s not unprecedented, she said. In 1993, the federal government lifted the cap for Medicare.

“Social Security and Medicare are two of the most successful federal programs and I don’t think that we will let it lapse,” she said. “Most of us are not wealthy enough to make it through the rest of our lives without some form of help from either program,” so eventually the cap will have to be lifted or modified she said.

Altman agrees, arguing that requiring wealthy Americans to pay year round is an issue of fairness.

“Social Security works extremely well, but its benefits should be increased and expanded. A fair way to pay for benefit improvements is to require millionaires and billionaires to pay Social Security contributions on every dollar of their salaries, just as typical Americans do.”

Lifting the social security cap and restricting benefits to those who need them is sure to be a divisive idea; it stops those who have contributed the most into the Fund (the wealthiest) from receiving any benefits. The threshold for not receiving benefits would have to be a very high level of wealth, to ensure people who have worked hard and are fiscally prudent (yet still need social security benefits to enjoy their retirements) are not penalized for such laudable lifestyles.

However, if the goal is to ensure that social security funds exist for those who need them, to the benefit of individuals and the economy as a whole, then lifting the cap and restricting benefits to the richest people is an idea worth exploring.

I have not attempted to put any exact numbers to this proposal, as it is more of an ideological question at this point. Is the purpose of Social Security to get out (part) of what you pay in, or is it to ensure people can survive their latter years in dignity and comfort? Is Social Security an investment (a retirement account), or is it a safety-net?

This question touches on a larger point about “contributing” and “taking” in America’s social welfare model. In the context of widening inequality and a disconnect between wages and productivity, in a country where money = free speech = political influence = exorbitant wealth, is it so unfair to ask those who milk this system to fund a dignified life for those who make it run with their hard work (at least until a more radical re-democratization of America’s political economy takes root)?

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