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As President Barack Obama looks to strike a “grand bargain” on the deficit by July, Social Security is being targeted for cuts.

But the alarm over the system’s supposed weak fiscal health is more about deficit hysteria than real facts.

Social Security will be solvent for years. And whatever tinkering it needs can be achieved without harming the overwhelming majority of beneficiaries.

Currently, the regressive payroll tax that funds Social Security maxes out at $113,700. That means wealthy individuals are not taxed on their earnings above that amount while the workers who earn less are taxed on their entire income.

One simple step—doing away with the current cap structure—would not only eliminate the inequity of the payroll tax but also guarantee the solvency of Social Security for three-quarters of a century without raising the retirement age or cutting benefits.

A bill sponsored by Sen. Bernie Sanders (Ind.-Vt.) calls for scrapping the cap.
His sensible proposal should be a part of the discussion as Washington politicians seek to address the deficit by introducing changes in the country’s three principal entitlements, Social Security, Medicare and Medicaid.

The Social Security system is currently fully funded until 2037, according to its trustees. Scrapping the payroll tax cap would virtually eliminate the projected funding shortfall for the next 75 years.

Unfortunately, the beltway power brokers and pundits—including President Obama—seem to be coalescing around a proposal to change the inflation formula used to set Social Security payments—and that would reduce benefits.

“Social Security is facing an unprecedented attack from those who either want to privatize it completely or who want to make substantial cuts,” said Sanders at a news conference on March 7 in which he announced his introduction of the bill to eliminate the cap.

“The argument being used to cut Social Security is that because we have a significant deficit problem and a $16.6 trillion national debt, we just can’t afford to maintain Social Security benefits,” he said. “This argument is false. Social Security, because it is funded by the payroll tax, not the U.S. Treasury, has not contributed one nickel to our deficit.”

Senate Majority Leader Harry Reid (Dem.-Iowa) is a co-sponsor of the legislation. Rep. Peter DeFazio (Dem.-) has introduced companion legislation in the U.S. House of Representatives.

Specifically, the Saunders bill calls for applying the 12.6 percent payroll tax to individuals with earned incomes of over $250,000. By kicking in at that amount, the legislation would only affect only 1.3 percent of the workers paying the Social Security payroll tax, according to the Center for Economic and Policy Research. For a millionaire and the employer, the new tax burden would be $46,500 each.

The scrap-the-cap proposal flies in the face of the notion that all of us must “share the burden” as the country addresses the deficit. But the deficit hawks who promote that agenda in effect are ignoring the reality that our country over the last three decades has become a plutocracy in which the wealthy have enjoyed the fruits of production while everyone else has seen their income stagnate and drop.

As inequality rises, incomes fall, traditional pensions disappear, and the 401(k) fails as a retirement vehicle, Social Security needs to be strengthened not gutted.

“Two-thirds of Americans who are over the age of 65 depend on an average annual Social Security benefit of $15,168.36 for at least half of their income,” wrote Thomas B. Edsall in a March 6 New York Times blog post titled “The War on Entitlements.” It is people like them who will suffer if the predominant “reform” proposals—raising the retirement age and cutting benefits—are adopted.

The proposal to adjust the Consumer Price Index used for calculating the Social Security benefit—known as the “chained CPI” is one of those proposals. It would constitute another attack on the standard of living of recipients. Using the chained-CPI formula for determining benefits for Social Security would result in the typical 65 year old living on some $15,000 a year receiving $650 less each year when they turn 75 and $1,000 less a year when they turn 85, according to Sanders.

“We shouldn’t cut benefits or try to balance the budget on the backs of seniors who have earned these benefits,” said DeFazio. “We can just close a tax loophole that allows millionaires and billionaires to pay a lower percentage of their income into Social Security than everyone else.”

“Ninety-four percent of the country pays Social Security taxes on all their income. Six percent do not. This has got to change,” Sanders said.

Originally posted to www.thenewcrossroads.com on Sun Mar 10, 2013 at 07:50 PM PDT.

Also republished by Social Security Defenders.

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Comment Preferences

  •  Does Anyone Know What Would Happen if We (7+ / 0-)

    merely applied the present payroll tax at the same rate and cap level, to absolutely all forms of income, including cap gains and estates?

    We are called to speak for the weak, for the voiceless, for victims of our nation and for those it calls enemy.... --ML King "Beyond Vietnam"

    by Gooserock on Sun Mar 10, 2013 at 07:55:37 PM PDT

    •  Mo Money (2+ / 0-)
      Recommended by:
      Gooserock, 207wickedgood

      We could lower the rate and still bring in more money.

    •  Good question (1+ / 0-)
      Recommended by:
      Words In Action

      The problem with this solution, I suspect, is that while it wouldn't really affect high earners, who are still going to be capped at present levels since their combined income is well over the cap, it would dig into middle class workers earning below the cap, hurting them and perhaps discouraging investment. So I'm not sure if this is a good solution unless we have a separate "payroll" tax for non-earned income, with a floor to protect lower income earners.

      "Liberty without virtue would be no blessing to us" - Benjamin Rush, 1777

      by kovie on Sun Mar 10, 2013 at 09:06:49 PM PDT

      [ Parent ]

    •  I believe earned income is about half of all (0+ / 0-)

      income, that investment income is about 40-45%, and that this is another number that has doubled with supply-side economics.

      One of the major differences between Democrats and Republicans is that the former have the moral imagination to see the moral dimension of financial affairs, while the latter do not. Some pragmatists are exceptions.

      by Words In Action on Sun Mar 10, 2013 at 09:42:00 PM PDT

      [ Parent ]

    •  SocSec doesn't tax investment income (0+ / 0-)

      because that income does not stop when we are retired. SocSec payments are not income taxes, but rather wage and salary "insurance". Investment income continues even after we stop working. As FDR noted as it regarded SocSec "from capital nothing is asked, to capital nothing is given".

      "let's talk about that"

      by VClib on Mon Mar 11, 2013 at 10:58:09 AM PDT

      [ Parent ]

  •  You forgot the "Cap" in the title (6+ / 0-)

    It reads as if you're for eliminating the tax entirely, which wouldn't be very good for SS's solvency I'm pretty sure! :-)

    "Liberty without virtue would be no blessing to us" - Benjamin Rush, 1777

    by kovie on Sun Mar 10, 2013 at 07:56:08 PM PDT

  •  I think your title is 3 letters short (4+ / 0-)

    Disclaimer: If the above comment can possibly be construed as snark, it probably is.

    by grubber on Sun Mar 10, 2013 at 07:57:25 PM PDT

  •  What the two above me said/ (2+ / 0-)
    Recommended by:
    Gooserock, elwior

    Further, affiant sayeth not.

    by Gary Norton on Sun Mar 10, 2013 at 08:09:54 PM PDT

  •  Are you missing a word in your title? (0+ / 0-)

    Cap?

  •  Sanders Bill does not eliminate the cap (6+ / 0-)

    It modifies it in a way that creates a donut hole between the current cap and $250,000.

    Per CBO a total cap increase eliminates the actuarial gap, while this donut hole proposal would only eliiminate maybe 2/3rds of it.

    Leaving a hole almost exactly the size of the 'fix' of Chained CPI.

    And the fact that Reid is a co-sponsor opens the possibility that this is just a setup for a package deal of Donut Hole AND Chained CPI. As opposed to the Begich-Deutch Bill which fixes the entire gap without resort to Chained CPI.

    I oppose both bills because I don't believe cap increases are the way to go (subject of a different post), but if I had to support one it would be the one without the conspicuous hole.

    I trust Bernie. Assuming he was not played by leadership and the White House. But he needs to present a complete package scorable as fixing the entire actuarial gap. And there are all kinds of possibilities for a Sanders Plus Bill that would do exactly that.

    Because: Show Me. And I am not even from Missouri.

    socialsecuritydefender.blogspot.com - SocSec.Defender at gmail.com - founder DK Social Security Defenders group - (hmm is there a theme emerging here?)

    by Bruce Webb on Sun Mar 10, 2013 at 08:15:47 PM PDT

  •  So if the cap goes off, does that mean (1+ / 0-)
    Recommended by:
    elwior

    Those who would pay tax on higher income would also see their SS max payment go up as well?

    •  I'm sure, but that would have to be capped (0+ / 0-)

      or else it would negate the extra revenue.

      "Liberty without virtue would be no blessing to us" - Benjamin Rush, 1777

      by kovie on Sun Mar 10, 2013 at 09:09:13 PM PDT

      [ Parent ]

      •  Not really .... there is a "break point" (0+ / 0-)

        in the current formula that means that you get less back in benefits when you are above a certain bend point  If you cap the benefit totally, then the FICA tax becomes the ultimate progressive tax - 100% tax and no benefit, whereas if you just keep bending the bend point, it is merely progressive, not totally confiscatory.

        •  It has to be asymptotic (1+ / 0-)
          Recommended by:
          Denver11

          Otherwise, with no tax cap, some people could conceivably get millions in benefits. But I assume the tax would be too. I.e. the rate goes down to 0% eventually, while benefits hit a ceiling eventually.

          "Liberty without virtue would be no blessing to us" - Benjamin Rush, 1777

          by kovie on Mon Mar 11, 2013 at 08:37:05 PM PDT

          [ Parent ]

  •  Obama knows this. Yet he is pushing for cuts. (2+ / 0-)
    Recommended by:
    207wickedgood, elwior

    I remember Campaign Obama noting that all it would take to solve any problem with Social Security would be to lift the cap. He said it so forcefully and matter-of-factly, that I was cautiously thrilled.

    You all know Campaign Obama, right? That guy who says everything you want to hear? To quickly be replaced by Actual Obama, who seems to have forgotten the simple solution he previously put forth, and is now gunning for pain, austerity, and CPI, etc.

    He knows better. He could lead on this. He doesn't.

    It would be popular. It would be moral. It would help get us going back in the right direction. But apparently that was all just sweet nothings from Campaign Obama.

    Sigh.

    Life is a school, love is the lesson.

    by means are the ends on Sun Mar 10, 2013 at 08:44:14 PM PDT

    •  Campaign Obama said no such thing (4+ / 0-)
      Recommended by:
      kovie, elwior, Theodore J Pickle, kayak58

      Social Security Works in winter 2010 did an exhaustive search of all Obama public record comments on Social Security and even threw a few dollars my way to do some double checking.

      Obama/Biden was consistent in pushing versions of this Donut Hole proposal with rates ranging from 2-4%. But always exempting people earning under $250k to be consistent with his campaign promise not to raise ANY taxes on that cohort.

      On the other hand neither the SSW people or me was able to find an unequivocable call against what are now termed "tweaks" as in Chained CPI (and in fact his chief early SS advisor Liebman was on record for exactly that). Instead Candidate Obama as with President Obama was firmly opposed to "slashes".

      Frankly I found the message discipline on this astonishing. If you do in fact have a solid citation to a case when Obama said something different you might want to forward it to Social Security Works care of Alex, Dan or Frank and if you can Private Message it to me. I would be fascinated.

      socialsecuritydefender.blogspot.com - SocSec.Defender at gmail.com - founder DK Social Security Defenders group - (hmm is there a theme emerging here?)

      by Bruce Webb on Sun Mar 10, 2013 at 08:56:39 PM PDT

      [ Parent ]

  •  A lot of people don't even know there is a cap. (0+ / 0-)

    guns are fun v. hey buddy, watch what you are doing -- which side are you on?

    by 88kathy on Sun Mar 10, 2013 at 10:32:02 PM PDT

  •  That right there socialism! (0+ / 0-)

    Or something. But, whatever it is it's taking money out of the bank accounts of the ubers and filthys (rich), which takes more money out of "The Economy." And, since "The Economy" is God, his self, it's not a good idea to take money out of God's pocket and put it into the pockets of unproductive slacker seniors. Just saying.

  •  In that case, wouldn't the higher contributors (0+ / 0-)

    be eligible for an increased level of benefits, making the whole thing a wash?

    •  RB - it wouldn't be a wash for two reasons (1+ / 0-)
      Recommended by:
      Roadbed Guy

      The benefit formula is highly progressive and would like bend more in that direction for the high earner benefits. In addition, the higher collections would start now and the benefits paid later so the SocSec Trust Fund would have the time value of money as well.

      That being said I think the donut hole plan is a joke. Let's raise the cap to $200,000. That solves most of the problem.

      "let's talk about that"

      by VClib on Mon Mar 11, 2013 at 11:02:12 AM PDT

      [ Parent ]

      •  I'm not against having a cap per se (0+ / 0-)

        I guess I'm just not clear on all the nuances (one of which I thought to be was that as more contributions were made, the more payback would ultimately accrue - you know, to make it clear that this was not a "welfare" program - the likes of which are strangely unpopular in our country .. . )l.

        •  Bend points are not just for Gumby (0+ / 0-)

          Social Security is set up in a way that the average income worker gets a 40% replacement benefit, lower income workers 50%, and upper income ones 30%. But the actual 'bend points' are set at 75% and 15% of replacement even as the contribution rates remain constant.

          Meaning that really low income workers who still qualify for enough working quarters to earn benefits "enjoy" a retirement benefit 75% of the not actually living wage they earned as a part time minimum wage worker. Trust me most people wouldn't enjoy subsisting on a minimum SS benefit.

          On the other hand higher wage workers only get a 15% of replacement benefit on earnings above the second 'bend point' leaving a certain amount of their FICA tax on the table to improve solvency/subsidize the lucky ducky 75%  replacement of "Not enough to live on" folk.

          At no point is there an actual inversion, every SS worker gets some added benefit for working more hours more years at more wages than those that were less lucky/industrious, and only the most selfish obsessed on ROI dick would worry about the downwards transfer involved.

          On the other hand the world is full of selfish obsessed on ROI dicks. So there you go. But the upshot is that lifting the cap sweetens the check of the uppers a little while contributing a lot to the folk who bumped along the bottom. It isn't a zero sum in favor of the Ups. Nor is it necessary to just tell them to screw off and suck up because the Downs need the bucks by capping benefits. Properly balanced it is win, win.

          socialsecuritydefender.blogspot.com - SocSec.Defender at gmail.com - founder DK Social Security Defenders group - (hmm is there a theme emerging here?)

          by Bruce Webb on Mon Mar 11, 2013 at 05:03:22 PM PDT

          [ Parent ]

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