Another Bad Ceiling

Social Security has been an object of suspicion ever since it began in 1935. Conservative critics warned it would be a stalking horse for socialism, the death of thrift and charity, and a crippling burden on employers. It turned out to be none of these things, and instead became one of the most successful and popular government programs in the nation’s history.

Before Social Security about half of America’s senior citizens lived in poverty; now about 10 percent do. These are figures to keep in mind the next time you hear that the federal government can’t do anything right.

Because of the program’s popularity, politicians have long been wary of attacking it openly, but some have never forgiven it for its success—especially after it became a model for other major federal initiatives designed to help vulnerable groups: Medicare and Medicaid, and, more recently, the Affordable Care Act. To those who believe that only the free market can efficiently meet social needs, Social Security stands as an inconvenient counterexample.

Conservatives gave up long ago on convincing voters that Social Security is a bad thing; instead they now argue that, even if it’s a good thing, we can no longer afford it. They say our only options are to cut benefits or privatize the program, as President George W. Bush tried and failed to do in 2005.

Although the Congressional Budget Office now estimates that Social Security will be fully funded until 2038, the program’s critics are not wrong to question its long-term sustainability. They warn that as the country’s population ages, there will eventually be too many retirees receiving benefits and not enough workers contributing to the system.

In 1983, a special commission tried to fix this looming shortfall by increasing the payroll taxes that fund Social Security and raising the age of eligibility for benefits, from sixty-five to sixty-seven. The commission assumed that by gradually lifting the Social Security tax ceiling—the income level above which no tax is paid—it would ensure that the same percentage of the nation’s total income was taxed from one decade to the next.

But the commission failed to anticipate another long-term trend: while Americans were living longer and having fewer children, the distribution of the nation’s income was growing more and more lopsided. Today, the richest 1 percent of Americans take home over 20 percent of the nation’s total income, almost twice as much as they did in 1983. And, thanks to the ceiling—currently set at $106,800—they pay no Social Security tax on most of what they make. As a result, the Social Security payroll tax now touches only 84 percent of the nation’s income, down from 91 percent in 1983. Lifting the cap to $180,000 would close that 7 percent gap. Getting rid of the cap altogether without increasing benefits would solve Social Security’s funding problem for the foreseeable future.

Of course, most Americans—more than nine out of ten—pay the Social Security payroll tax on all their income. And, according to a January poll, most people think those who make more than $106,800 should have to do the same. Seventy-seven percent of Americans, including 69 percent of Republicans and 67 percent of Tea Partiers, say they would rather lift the payroll tax cap than see a cut in benefits and a higher retirement age.

There’s never been a ceiling on the payroll tax for Medicare, so why should there be one for Social Security? The only good answer is historical: the program’s original sponsors capped the tax to get the votes they needed seventy-six years ago. Now that benefit payments have begun to exceed new contributions, it may be time to reconsider that concession.

Senator Bernie Sanders (I-Vt.) is introducing legislation that would apply the tax to all income over $250,000 a year. His bill may have no chance of getting through this Congress, but President Barack Obama ought to endorse it anyway, especially since he supported the same proposal in his 2008 campaign. The president would thereby remind voters that there is an obvious alternative to cutting benefits, and he would force the enemies of Social Security to openly reject that alternative instead of just ignoring it. During his presidential campaign, Obama noted that “somebody like Warren Buffett pays a fraction of 1 percent of his income on payroll tax, whereas the majority...pay payroll tax on 100 percent of their income. I’ve said that was not fair.” The American people have said it, too. Even Warren Buffet is saying it. Let them keep saying it until Washington responds.

Published in the 2011-09-23 issue: 

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