How Do We Save Social Security

The solution to saving Social Security is simple: cut spending, raise revenue or both. The details are the difficult part. Noneof the approaches is politically palatable and all have negative economic consequences. However, a phased elimination of the $106,800 cap on annual income subject to FICA taxes will provide firmer financial footing for Social Security and the U.S. structural debt than reductions in benefits. Here’s why:

• Cutting benefits, which are already low by global standards, raises the possibility of more cuts down the road. If you tell me today you’re willing to lower my benefits when I retire, what’s to stop further cuts between now and then? Reducing benefits undermines the “security” safety net of Social Security.
• Removing the cap affects only 17 percent of wage earners; reducing benefits affects 100 percent of Social Security beneficiaries.
• By exempting income above $106,800 from the FICA tax, we place a much larger tax burden on low- and middle-income wage earners. The lion’s share of increases in real wages over the past 25 years went to the upper 20 percent of earners, while real Social Security benefits remained flat. Cutting benefits would further undermine the intended progressivity of “Social” Security.
• Raising the taxable income cap would send a strong signal to global markets that the United States is willing to make the difficult decisions, and make them now. Lifting the cap on Social Security taxes immediately adds revenue to the budget. Raising the cap is not simply soaking the rich. Far from it. If you pay into the system, no matter your income, you are entitled to benefits.

An infrequently mentioned part of the original bargain struck in 1938 is that we are all paying for the retirement income received by the generation that fought in two World Wars and survived the Great Depression, a.k.a. the “Greatest Generation,” whose sacrifices contributed to the peace and prosperity we enjoy today. Therefore raising or eliminating the cap altogether is asking those who are benefitting most from the oldest generation’s labors to pay a larger share of that original cost.

Admittedly, our lackluster economy could be slowed even further by a tax hike, so here’s what we do: Remove the cap on taxable income but initially exempt from the tax all income between $106,800 and $350,000; commit to gradually shrinking the exemption over the next 8 to 10 years; then move forward with no cap at all.

By removing the cap the Social Security trust fund will remain in the black until 2083, even with the longer expected lifetimes of the baby boomers and including the increased benefits for those who pay more into the system. If we remove the income cap but maintain the current benefit structure, i.e. no increase in benefits for those earning more than $106,800, the system is actuarially sound beyond the 75-year forecast range of the Congressional Budget Office.

Christopher Laincz is an associate professor of economics at LeBow College. He will reach retirement age in 2038.