Soc Sec XVII: Cap Increases & Donut Holes

by Bruce Webb

Andrew Biggs at his site Notes on Social Security Reform spotted and copied a remarkable article from the WSJ under the title Obama’s Social Security Plan Draws Critics, Even Dems. Why remarkable? Because the people quoted actually seem to know what they are talking about, rather unusual for a MSM publication. Rather than copy it I urge people to pop over and if you like leave a comment with Andrew (who really needs more traffic and more critical comments).

Along with a general discussion of the reason the payroll cap exists to start with they throw out some numbers. One is that the 1983 Commission targeted 90% of wage income but that over time that amount had slipped to 84%. Indeed the LMS plan’s payroll cap increase explicitly targets that 90%. Which raises the question of why 90% and not 95% or 85%? Why in the face of an overall system imbalance does it fall only on wage earners in the narrow band between 84% and 90% pick up the whole tab, particularly when you note this only applies to wages and not capital. Either Retirement Security is a societal imperative, in which case capital should have a say, but also a bill, or it really is worker funded insurance and that certain higher (but not highest) have the unique responsibility for bailing it out, and under some plans don’t actually get any more out. Conceptually does this make sense?

Another number not mentioned explicitly is 78% which is to say the level of benefits projected to be paid out in 2042 under Intermediate Cost projections. Why given Rosser’s 78% of 160%= 125% when we look at this from the standpoint of real benefits what makes this a crisis? And one which I have to pay for but which leaves hedge fund managers off the hook?

Also raised is the idea of putting in a donut hole of between $102,000 & $250,000 and only taxing wages above that level. Which just turns the first question on its head. Here instead of putting it all on the 84% to 90% people, they get leap frogged and people up stream get popped. Why? And again why not put some of the burden on the capital side?

I believe a cap increase is a bad idea for reasons discussed in this article, the existing cap provides a measure of political protection for the overal program. But if we have to increase it in ways that move Social Security from insurance to a transfer program why would we simply target these various narrow slices of wage workers to do it? I expanded on this last point in my comment at Biggs. That comment is duplicated under the fold.

(To Andy Biggs) A good article particularly when compared to most of what is published. But it largely left out the point that there is no incidence of FICA on income from capital gains and that there is a big difference between a 90% level of wages and a 90% level of income. If we have to move Social Security farther in the direction of a transfer program it is difficult to see why we would give the truly wealthy a free pass or limit the obligation to wage earners up to but not beyond 90%. Either it is worker paid insurance or it is a societal obligation to be shared by all. Insisting that a relatively narrow band of upper middle class wage earners pick up the entire tab is rather odd.

Because Hillary’s point was a little off. Since Social Security applies to individual rather than household income a cap increase will not hit much of the public sector at all, beyond some University Presidents and Football coaches and maybe a Police Commissioner here or there few public servants are dragging down significant amounts over the current cap. But what a cap increase is is a direct assault on the professional and managerial classes each of which is in position where they could likely manage or bargain for a change in the composition of their compensation packages to make more of it look like returns on capital rather than wages.

Center-right economists argue that people will react strongly even to small changes in top marginal rates. A cap increase would be a huge increase in top rates of either 6.2% or 12.4% (depending on where you fall down on where the incidence of the employer match really falls). From what I can see the best title for such a bill would be the Compensation Consultant and Tax Lawyer Relief Bill of 2009, because some of people are going to make out like bandits on this one, a group that maybe doesn’t include the Trustees. The proposal seems to ignore the idea of tax planning altogether. (I don’t believe in tax avoidance per se, which doesn’t mean I would consider setting up a partnership or corporation in a way that minimized my burden to necessarily rise to that level.)

(And it should be mentioned that the short term impact of a cap increase is potentially negative by swelling the interest owed on an even bigger Trust Fund. You have to be pretty naive to believe that Washington had the discipline to use these new dollars dollar for dollar to lower other borrowing, which would be the only way to offset this new interest obligation for future taxpayers.)

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