Relevant and even prescient commentary on news, politics and the economy.

Why Progressives Should Reject Social Security Cap Increases

The basic reason is simple: it undercuts the broader progressive agenda. Also it buys into a particular Right economic meme. Both are huge mistakes.

To understand this we need to step back and examine overall tax policy and tax progressivity. What should progressives want? Well I suggest that as a first step we restore top marginal income rates back to Reagan levels (50%) and extend them to all income including realized capital gains. And then as some potential second stop restore those top rates to Kennedy levels (70%). At this point the Federal government would have the funds to start addressing all parts of the progressive agenda from childhood education and health to retirement security in a direct way, that is we could once again engage in the New Deal and the Fair Deal in a quest to achieve the Great Society. Or in more restrained rhetoric start working on social democratic solutions to broad societal problems.

But if progressives and Social Democrats agree on this then proposals to lift current Social Security wage caps and/or extend FICA to all income starts crowding out any possibility to tax THAT SAME INCOME via changes in marginal rates. Moreover it floods cash into and through a Trust Fund system that doesn’t allow expenditures on anything other than the specific programs involved. With the result that the rest of the progressive agenda remains stymied by the crowding out effect even as the Right can ‘explain’ that ‘you can’t have nice things’ because all the money is going to Social Security. Thus proving that the whole program was ‘unsustainable’ to start with and that any extensions of it, say in the direction of Single Payer Health Insurance, is just foolish and ignorant.

The truth is that the actual cash flow issues facing Social Security are minor and manageable within its current structures. Indeed almost all that needs to be done for Social Security going forward can be addressed by policies focused on increasing real wage and labor share via minimum wage and wage theft/suppression enforcement and by embarking on a much needed direct expenditure on public infrastructure. After all 12.4% of every wage dollar funded directly by a bridge replacement projects and 12.4% of every wage dollar produced by the multiplier effects of those wage workers spending their remaining wages flows directly into Social Security anyway. Meaning that jobs projects ARE Social Security ‘reform’.

George Laffer wasn’t entirely crazy. There is a maximum rate of tax extraction that corresponds with the greatest growth of the economy. It would just seem that depending on how you structure the incidence of that tax between wage income and capital income the empirical data shows that rate to be closer to Johnson and Kennedy’s 70% than Reagan’s 50% then 35% or Clinton’s 40%. So lets get cracking on raising marginal tax rates. But that effort is only impeded by progressives explicitly endorsing ‘Social Security Crisis’ and sending any and all increased tax revenue through the Trust Funds.

This isn’t to say to neglect Social Security entirely. The DI Trust Fund needs an immediate boost in revenues and the OAS Trust Fund would well be served by a gradual increase in FICA rates (hi Coberly!). But that doesn’t require extending FICA to all income, that is simple overkill and overreaction to what Dean Baker and Mark Weisbrot appropriately named the Phony Crisis in their book back in 1999.

To me the broader progressive economic agenda is simple: Restore top marginal income tax rates to 50%, or better 65%. Pursue policies explicitly focused on increasing employment, real wage and so labor share. And then—. Well there doesn’t really need to be much more “And then”. Certainly not in regards to major adjustments in the structure of Social Security finance, that just will work itself out with the combination of higher employment at higher wages and maybe some tinkering with FICA rates under the current cap formula.

Progressive Taxation and MJ.ABW (More Jobs. At Better Wages). And oh yeah – leave Social Security alone (at least mostly). Cap Increases are just a diversion from the real progressive solutions to the total progressive agenda.