Thursday, November 22, 2012

Bill To Lift Social Security’s Tax Cap

Democratic Senator Introduces Bill To Lift Social Security’s Tax Cap, Extend Its Solvency For Decades
Jeff Spross
Nov 16, 2012

Social Security, the government entitlement that provides support to seniors in retirement, the disabled, and other Americans, has long been in the cross-hairs of budget reformers. The program’s trust fund currently won’t be spent out until 2033, and after that it would still pay 75 percent of scheduled benefits.

Most of the proposed solutions to the shortfall involve cutting back benefits and raising the minimum retirement age. Both are deeply problematic; at its current level of benefits Social Security kept over 20 million people out of poverty in 2011, many Americans in demanding manual labor jobs already take early retirement and thus reduced benefits as it is, and lower-income Americans have not particularly benefited from the average rise in lifespans.

This week, however, Sen. Mark Begich (D-AK) put forward a reform package that goes in the opposite direction, while still financially securing the program’s trust fund for roughly the next seven decades. The Washington Post’s Dylan Matthews laid out the details:

The Begich bill would lift the current payroll tax cap, which exempts wages in excess of a certain amount ($110,100 this year) from the tax. In turn, it would give high earners, who would pay more, additional benefits upon retirement, just as benefits increase as wages do for workers below the cap. […]

It also increases benefits across-the-board. While Bowles-Simpson and Domenici-Rivlin adopt a stingier “chained CPI” measure for inflation, Begich adopts “CPI-E,” or a measure that specifically captures inflation in goods that seniors buy.

Due to deteriorated health and other considerations, goods seniors buy tend to be more expensive than those younger people purchase. Begich’s CPI-E change would mean, effectively, a 4.5 percent benefit increase for the program’s beneficiaries, including not just seniors but their designated survivors and disabled Americans as well.

The Congressional Research Service ran the numbers back in 2010 and concluded that eliminating the payroll tax cap — while also paying out the new benefits to wealthier Americans in accordance with their new taxes — would eliminate 95 percent of the trust fund’s shortfall over the next 75 years.

Begich may not hit that goal exactly, depending on how the legislation is written. In particular, his change to CPI-E also lifts the overall benefit level, on top of the changes in CRS’ scenario. But his reform would probably come very close.

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