Social Security: It Does Have a Single Solution

What should be done to ensure the solvency of the social security system has been the subject of much debate - some of it substantial, much of it political.  With an aging population and with the baby boomers ready to retire, the portion of our elderly population is set to rise beyond any levels known historically, and that puts a particular strain on social security.

There have been some policy proposals to seriously consider: conservatives, and some Democrats, have come on board the idea of increasing the age of retirement.  Others have suggested raising or eliminating the cap on taxable social security income, and yet others have suggested a combination of both.  I will try to explore both, but we will also see that actuarial numbers say that eliminating the cap alone (without increasing benefits) will make social security solvent for 75 years and beyond.

Raising The Retirement Age:

The concept and the logic: Liberals are predisposed to have a visceral reaction to any increase in the age for retirement.  To us, it screams of squeezing out more work from someone who has already worked close to 40 years.  Going beyond the instinctive reaction, though, there is something to be said for the logic behind it.  When Social Security was enacted, life expectancy in the United States was 63, as a matter of fact, two years before the retirement age of 65.  Life expectancy in this country is now over 78.  If people are paying in for the same amount of time and taking money out of the system for longer, barring a huge explosion in immigration (who would need jobs and who would then age as well), it would no doubt cause a drain on the resources.

Why it won't work: This proposal to raise the retirement age, however, comes with several pitfalls, if thought through deeply.  First, the later someone retires, the later their job opens up for someone new in the job market.  A much more robust growth in employment would be required to not let a rising retirement age become the cause of an unemployment crisis (on top of the current one we already have).  Also, while life expectancy has increased dramatically thanks to medical science, there is no evidence that people's ability to work has also extended to older years in life.  In fact, 60% of our nation's chronically ill are below the current retirement age of 65.  Not that chronic illness always means the loss of ability to work, but it is evidence that while living years have been extended, ability-to-be-working years have not necessarily been.

Eliminating the Tax-Cap on Social Security

The concept and the justification: Currently, one's income up to $106,800 a year is taxed for social security.  Any income above that is not taxed.  This makes for a regressive tax system.  If you make $50,000 a year, you pay social security taxes on your entire income.  If your CEO makes $500,000, nearly 80% of his income is exempt from social security taxes.  That is unfair.  A progressive school of thought has long urged for raising this cap, or eliminating it altogether.  This would make social security a fairer tax system, and will finally ask the wealthy to bear a fairer portion of our most important social contract.

How it works and the numbers: Only about 6% of our country's income earners make above the cap (so they would be the only ones affected by it), but eliminating the cap altogether (or even raising it) would raise significant revenue.  In fact, the Congressional Research Service studied three proposals in 2008 - make 90% of earnings taxable while accordingly increasing benefits, eliminate the cap entirely while accordingly increasing benefits, and eliminating the cap entirely while keeping benefits at current level - and found that eliminating the cap without increasing benefits (the rich do not need extra money from social security over what they already get) would not only make social security solvent over 75 years, it would result in a surplus over that time.  Even increasing benefits while eliminating the cap would erase 95% of the estimated shortfall.

From this data, Dylan Matthews over at the Washington Post made a nifty chart.

Social security proposals and shortfall

As we can see, in fact, no adjustment of retirement age is necessary.  Merely making the social security payroll taxation fairer by eliminating the cap solves any solvency problem for social security for as long as projections can be made.

One may quarrel that this includes eliminating the employer side cap as well (employers pay half of your social security payroll tax), and that it might cause burden on business and be a strain on job creation or salaries.  I don't consider that to be a legitimate argument, and here is why: any employer willing to pay $110,00 and up to hire an employee is not going to back off simply because of the extra social security tax, otherwise, they did not need that employee at that salary at all.  Especially for executives who make insanely high salaries, I am not sure who exactly is supposed to cry because of the increase in a  multinational corporation's tax burden.


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