Social Security Fix a Nuanced Situation

This spring at a pre-primary-election “Meet the Candidates” event, I heard for the first time about “axe the cap.”

It supposedly is a move to eliminate the cap on earnings subject to Social Security taxes. Someone at the meeting shouted out a website name, but in an online search I was unable to find it.

However, a month ago I saw a story in The Hill where former Social Security Commissioner Martin O’Malley advocated that very view.

He argued that requiring higher-income earners to pay more is the solution to the program’s looming funding shortfall. O’Malley said lawmakers should raise the cap on earnings subject to SS payroll taxes rather than reducing benefits.

“It’s only 6% of us that experience any benefit from the cap and an even smaller percentage—three or four—who benefit from scrapping the cap on income above $250,000,” O’Malley said. “Most Americans . . . think it is unfair that wealthy people don’t pay the same tax rate as a custodian in a school or a teacher.”

Kicking the Can

I have been reading about the problem for two decades. Every December, when I received a notice (formerly by mail, now online) from Social Security about annual earnings and projected benefits, it included a warning: Without adjustments to the program’s income, as of 2034, the system might only be able to pay three-fourths of projected benefits.

Now, the time frame has been reduced to the end of 2032.

I must admit, in my mid-50s, I tended to shrug off those warnings. But with each passing year and no action forthcoming, I wondered how long Congress could kick the can down the road. Anyone care to choose 2031? Or midway through 2032?

I must admit that I was like those who think we should just get rid of it. If those of us who don’t have six-figure incomes to pad our lifestyles have to pay 6.2% on everything we earn, why shouldn’t the wealthy? Why should anyone who makes more than $184,500 skate on Social Security contributions above that amount?

That is, I thought that before scratching a bit beneath the surface. While searching online, I found the website of the Association of Mature American Citizens (AMAC), a conservative advocacy group for those 50 and older.

Nuanced Solution

In a nuanced article about Social Security’s problems, it talked about the problems just scrapping the cap can create.

The most cogent comment: “There are, of course, other downsides to the elimination of the taxable maximum, not the least of which is that adding 12.4% to the tax burden already shouldered by high earners would likely push the top marginal tax rate for this demographic above 50%.

“Economists typically equate this level of taxation with a diminished work incentive, a stifling of innovation, and reduced business investment. Less economic activity means less wages, which means less money paid into Social Security.”

AMAC proposes a number of steps, such as modifying the current annual cost-of-living adjustment (COLA) to provide an equal dollar amount for all beneficiaries, but not less than a 1% increase in benefits.

It also suggested eliminating or reducing the taxation of benefits by increasing the income threshold to exempt middle-class seniors’ benefits, gradually increasing the full retirement age, and others.

The biggest problem I see here is that the public doesn’t handle nuance too well. We want simple solutions when more complex steps are required. Maybe if we start acting soon, though, we won’t be staring over the precipice six years down the road.