Commentary | Retirement

Lifting cap on Social Security taxes would rescue retirement program

Opinion pieces and speeches by EPI staff and associates.


Lifting cap on Social Security taxes would rescue retirement program

By  Lawrence Mishel

President Bush launched his second term in the Oval Office promising to “make Social security permanently sound” and to “listen to anyone who has a good idea to offer” about how to do it.

Indeed, the president will need all the help he can get if he hopes to make a lasting fix to the Social Security program part of his legacy. Perhaps that’s why Bush has finally agreed to place upon the table the possibility of lifting the cap on Social Security taxes for the nation’s top wage earners.

Many people don’t realize that all earnings are not subject to this federal payroll tax. In fact, current law exempts earnings of more than $90,000 from taxation, meaning someone with a million-dollar salary pays the same tax as someone earning $90,000. Any public policy discussion addressing the potential financial shortfall of this program should rightly focus upon the dramatic growth of wages for top earners over the last two decades, a time when middle-class wages have remained relatively stagnant.

The consequences of this increasing wage gap are no small matter. If left to continue, it will result in extraordinary inequalities and the undermining of Social Security’s financing. Eliminating the $90,000 cap, however, would erase much of the projected Social Security shortfall over the next 75 years.

President Bush would do well to not only place this option upon the table, but to serve it up as the main course. Unlike his plans for privatization, lifting or eliminating the cap is extraordinarily popular. According to a recent Washington Post poll, 81 percent of respondents support removing the cap, while proposals to raise the retirement age, cut benefits or increase the amount workers and employers pay in Social Security taxes fail to marshal even a slim majority.

To be fair, the cap has not always presented as much of a financial obstacle as it currently does. Two decades ago, the cap exempted only 10 percent of all wages. But as the growth in wages at the top has outstripped growth at lower levels, the amount of earnings exempt from Social Security taxes has grown to 15 percent. And while the cap on taxes is tied to a cap on benefits, those who receive the maximum benefits are now paying taxes at a lower rate.

The taxable wage base eroded because the wages of top earners grew far faster than the wages of the typical worker, putting more wages out of reach of the payroll tax and undermining the system. If the cap were raised to a level where 90 percent of all wages were taxed as was the case in the early 1980s, then the cap would need to be at about $140,000.

This is well known in policy circles, if not among the general public. But even among policymakers, it has been far too easy to disregard the fact that those benefiting from the Social Security cap actually make up a shrinking percentage of our work force (just 6 percent today, down from 7.8 percent of the wage-earning population in 1980). In other words, a smaller share of the population now commands a much larger share of the earnings – which tells us that wages at the top have risen at an extraordinary rate.

In fact, the average earnings of those who benefit from the cap grew by 98 percent between 1980 and 2000. In contrast, earnings of the median worker rose just 20 percent over that same time period. In 1980, a high earner had wages 4.8 times more than the typical earner, a ratio that reached 7.9 in 2000.

The rich have indeed been getting richer over the past two decades. It is hoped that a focus on the untaxed earnings of those at the top will bring to light one of the great untold stories of our era: The fact that those at the very top reaped huge gains in wages, while the regular folks were just getting by. President Bush would leave a much finer legacy to our country if he could correct the inequalities in how Social Security is funded and, in so doing, preserve the future of this program for all Americans.

Lawrence Mishel is president of the Economic Policy Institute in Washington, D.C.


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