The Tribune Democrat, Johnstown, PA

William Lloyd

July 8, 2012

William Lloyd | Put Social Security focus on raising revenues

— Regardless of which party wins in November, Social Security will be under the budget-cutting microscope.

Social Security is financed primarily by a payroll tax on employers and employees. 

Historically, both employers and employees have paid the tax at the same 6.2 percent rate. Congress and President Obama lowered the tax rate on employees for 2011 and 2012 in the hope of boosting the economy, but both employers and employees are scheduled to pay 6.2 percent in 2013 and thereafter.

For more than 25 years, annual payroll tax revenues were sufficient to pay for the Social Security benefits owed in that year and contribute to a surplus to help pay for benefits in future years. However, because of the weak economy and the retirement of the baby boomers, it has become necessary to tap the surplus in order to pay current benefits.

According to the Social Security trustees, the combination of the surplus and the annual tax revenues will be sufficient to pay 100 percent of the promised benefits for the next 20 years. Once the surplus has been exhausted in 2033, the annual tax revenues will be enough to pay for only about 75 percent of the promised benefits. 

If nothing is done, many of today’s workers will face significant benefit cuts.

Social Security was intended to supplement private pensions and personal savings rather than to replace them. 

However, according to the nonpartisan Congressional Budget Office, Social Security now provides at least half of the income in about 57 percent of retiree households, and more than 90 percent of the income in one-third of retiree households.

For several reasons, this dependence on Social Security is unlikely to change when today’s workers retire.

First, according to the conservative Heritage Foundation, the employers of about half of today’s workers provide no pensions. Furthermore, many companies that do provide pensions have switched from plans which guarantee a specific benefit to plans in which the benefit depends upon the performance of the stock market.

Second, it will be difficult for many workers to build a significant retirement nest egg because their incomes have stagnated, the value of their homes has declined, and they owe (or will owe) substantial debts for their own education or the education of their children.

In short, today’s workers are likely to need Social Security benefits just as much as current retirees do. Therefore, the debate should focus on how to raise revenues rather than on how to cut benefits.

Under existing law, employers and employees pay the Social Security tax on only the first $110,100 of each employee’s annual salary. Neither employers nor employees pay that tax on any amount of a salary above the $110,100 cap. 

The cap is likely to increase in 2013 and in subsequent years, but by only a few percent per year.

The least painful way to avoid benefit cuts for future retirees would be to eliminate the cap and subject all of an employee’s salary to the Social Security tax. According to the Congressional Budget Office, fewer than 10 percent of employees earn more than $110,100. Therefore, eliminating the cap would increase taxes for only a relatively small percentage of workers.

Furthermore, employers would pay higher taxes only if they have employees who earn more than $110,100 per year.

Opponents argue that if the cap were eliminated, workers earning more than $110,100 (and their employers) would pay too much in comparison to those workers’ future Social Security benefits.

That argument assumes that once a person becomes a high-earner, that person’s salary will never decline significantly. However, the number of high-earners forced to accept lower-paying jobs in recent years shows the fallacy of that assumption.

An alternative would be to raise the Social Security tax rate on all employees and employers from 6.2 percent to about 7.35 percent. That would take money out of workers’ pockets today, but the higher Social Security benefits would be more than most of them could earn by saving the same amount of money.

Either alternative would guarantee 100 percent of promised Social Security benefits for the next 75 years.

A reasonable compromise: Retain the cap, but increase it significantly, and increase the payroll tax rate by a smaller amount than would otherwise be necessary. Such a compromise would require all workers to share in the burden, but would also recognize that high-earners have generally been doing better in today’s economy than average workers.

Raising taxes is unpopular.

However, without an increase in Social Security taxes, many of today’s workers will live in, or near, poverty after they retire.

William Lloyd represented Somerset County in the state House of Representatives (1981-1998) and served as the state’s Small Business Advocate (November 2003-October 2011). He is a resident of Somerset Borough. His column appears each month.

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