A Fix for Social Security

The Congressional Research Service released a report in September, "Social Security: Raising or Eliminating the Taxable Earnings Base," Janemarie Mulvey. It is a 27 page pdf.

Here are the first three paragraphs of the summary:

Social Security taxes are levied on covered earnings up to a maximum level set each year. In 2010, this maximum—or what is referred to as the taxable earnings base—is $106,800. The taxable earnings base serves as both a cap on contributions and a cap on benefits. As a contribution base, it establishes the maximum amount of each worker’s earnings that is subject to the payroll tax. As a benefit base, it establishes the maximum amount of earnings used to calculate benefits.

Since 1982, the Social Security taxable earnings base has risen at the same rate as average wages in the economy. However, because of increasing earnings inequality, the percentage of covered earnings that are taxable has decreased from 90% in 1982 to 85% in 2005. The percentage of covered earnings that is taxable is projected to decline to about 83% for 2014 and later. Because the cap was indexed to the average growth in wages, the share of the population below the cap has remained relatively stable at roughly 94%. Of the 9.5 million Americans with earnings above the base, roughly 80% are men and only 9% had any earnings from self-employment income. New Jersey has the highest share of the population above the maximum (11.6%) and South Dakota has the lowest share (2.1%).

CRS estimated the potential impact of eliminating the taxable wage base on future benefits and taxes. If the base were removed in 2013, CRS estimates that by 2035, 21% of beneficiaries would have paid some additional payroll taxes over the course of their lifetimes. However, the average change in taxes and benefits would be small. Looking only at individuals who would pay any additional taxes over the course of their lifetimes, at the median, total lifetime tax payments would rise by 3% and benefits would increase by 2% relative to current law. In general, those in the highest income groups would have the largest changes in both tax payments and in benefits relative to current law.

I want to make three points about this:

1) When discussing tax cuts we are calling incomes up to $200,000 for an individual middle class, but we are only collecting social security on the first $106,800 of income. That is considered the average income. There is a real disconnect when someone earning double the average income to be middle class, and a disconnect when we are only collecting social security on half of middle class incomes. Remember that congressional representatives earn more than $106,800 and thus don't pay social security tax on all of their income.

2) The growing inequality of income in the US is throwing off the balance of social security money collected and amounts earned. As larger incomes are earned by fewer people, those people are not paying more into social security. That doesn't seem right somehow -- that someone earning millions each year still only pays social security on the first $106,800 and none on any income above that.

3) Note this sentence "Of the 9.5 million Americans with earnings above the base, roughly 80% are men and only 9% had any earnings from self-employment income." If only 9% of those earning more than $106,800 have any self-employment incomes, why do we keep hearing that small businesses will be hurt by letting the current tax credits expire? That doesn't seem quite right.

Personally I think we ought to raise the base income level to at least $200,000, perhaps higher.