I oppose the proposed elimination in 2023 of the $160,200 limit on income subject to the 12.4 percent payroll tax rate paid to Social Security.
Dating back to the original days of the Franklin Delano Roosevelt administration, Social Security was designed with two goals in mind: (1) to enable low-wage workers, without access to insurance, pensions, and retirement accounts, to prepare for retirement and to insure against premature death and disability in a dignified manner, and (2) encourage work effort, especially at the prime working age. It does this by linking retirement, disability, and survivor benefits to the individual’s lifetime income.
While there is some redistribution from higher-wage workers to lower-wage workers so that lower-wage workers get proportionally more out of their taxes paid, Social Security is definitely not a welfare program in design and in its official description. Abolishing the income ceiling would further reduce the link between income and benefits. This would be politically damaging to the program and discourage work.
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In particular, imposing a massive tax hike — 12.4 percentage points — on the earnings of about 10 million highly productive middle-class workers earning more than $160,200 would have several notable consequences. It would reduce their support for the program, severely discourage their participation in the labor market, and encourage payroll tax evasion by converting earnings into incentive stock options and other forms of employee ownership.
It would also give them extra unnecessary benefits. Most of these workers have ample and often employer-subsidized access to pensions, retirement accounts and insurance. The ability to evade the tax would introduce an element of unfairness, as the highest-wage workers, such as corporate executives and professionals, would find it faster and easier than high-paid government, non-profit, and middle management employees to replace employee participation for wages. In many cases, these workers would have their wages taxed at the federal, state and local levels at rates in excess of 70 percent.
The reality is that most Americans who earn more than $160,200 aren’t exactly wealthy, especially if they live on the coast, have large families, or have high education or health costs. Many would have a hard time carrying the extra heavy load if the cap were removed.
Over time, the volatility of personal income also makes such a large tax increase unfair. Many employees have a high income temporarily or at the end of their career. According to the Social Security Administration, while about 6 percent of workers earn above the taxable maximum, nearly 20 percent of current and future covered workers are expected to earn above the taxable maximum in a year.
Taxing above the current maximum therefore does not mean that only the income of employees with very high lifelong incomes is recorded. Besides, many of these higher-income workers have already tapped out in recent years, with big tax increases going to Medicare and paying for the Affordable Care Act.
Even with the most draconian version of this proposal, where the tax cap is removed but no additional benefits accrue, and the extra money goes to Social Security, the revenue would be well below the amount needed for program solvency at the currently scheduled distribution. levels. According to the Congressional Budget Office, only about two-thirds of the annual deficit would initially be filled, shrinking to half in later years.
Proponents who think this change is an easy fix to avoid other program reforms are mistaken. In addition, they are ignoring the dire state of federal finances, which are rapidly deteriorating even beyond increasing demands on Social Security resources, and will require either program cuts, increased revenues, or a combination. If more revenue is the goal, where will it come from when we’ve already increased Social Security payroll tax rates by 12.4 percentage points for middle- and upper-income workers?
There are much more reasonable and fair ways to get a solvent Social Security program without increasing payroll taxes. These reforms reflect a modern economy, society and labor market, as well as new forms of retirement savings, while preserving the original purpose of the program.
Mark J. Warshawsky is the Searle Fellow at the American Enterprise Institute. He previously served as assistant secretary for economic policy at the Treasury Department and deputy commissioner for retirement and disability policy at the Social Security Administration.