Protulis, Steve - National Council of Senior Citizens

National Council of Senior Citizens
George J. Kourpias, President
Steve Protulis, Executive Director
8403 Colesville Road, Suite 1200
Silver Spring, Maryland 20910-3314
(301) 578-8800
Fax (301) 578-8999

The Social Security Tax Cap Secret

Advocates of Social Security privatization are working hard to convince the American people that Social Security is in deep trouble, and that the only solution is to transform the current social insurance system into a privatized system based on hundreds of millions of individual stock market accounts.
What privatization proponents consistently fail to mention, however, are the dangers inherent to their proposed solutions and the enormous gains to be had by simply raising the Social Security tax cap.
The True Scope of the Problem
You wouldn't know it to listen to some pundits and politicians, but Social Security's problems are quite modest, if they exist at all. Current concerns over Social Security's long-term financing are based on the assumption that the U.S. Gross Domestic Product will average only 1.5 percent annual growth over the next 75 years. The problem is that the United States has never sustained such low GDP growth outside of the first four years of the Great Depression. To put it another way: the notion that Social Security is "going to go broke" around 2032 is based on the idea that the United States will suffer a decades-long economic depression!
In fact the U.S. economy is roaring along-an uncomfortable reality for privatization proponents-and one they largely ignore. If we assume that the U.S. economy will grow at only 2.5 percent per year (less than the 3.21 -percent GDP growth the U.S. has averaged over the last 50 years), Social Security will never go broke!
A Shrinking Problem
Earlier this year, the Bureau of Labor Statistics made technical (and therefore noncontroversial) adjustments to the Consumer Price Index used to calculate Social Security's annual Cost of Living Adjustment or COLA. The result of this change to the CPI formula is that early next year the Social Security Trustees will report that Social Security's long-term actuarial deficit is 18 percent less than it was just one year ago.
The Dangers of Privatization
Prudent Americans will argue that we should err on the side of caution and make whatever changes are necessary to prevent the remote possibility of a long-term shortfall in the Social Security Trust fund. We agree.
Long-term shortfalls, however, are normally traversed by making small steps, not taking giant leaps of faith such as those advocated by privatization proponents. In fact, radical privatization schemes carry enormous costs and substantial risks.
Perhaps the greatest risk is that scores of millions of gullible Americans will be lured into risky stock market ventures by the siren-song of unscrupulous Wall Street traders. While Wall Street dangles the lure of "minimum-wage millionaires" before a gullible public, the only guarantee they offer is that they themselves will collect hefty management fees whether the market rises or falls. Those fees-estimated at $240 billion over 12 years-provide ample motivation for Wall Street to fund organizations willing to flack privatization schemes.
Nor is privatization a free lunch. Because old Social Security obligations will have to be paid, even as new Social Security revenues are being diverted into private accounts, taxes will have to be increased by 3 percent of taxable payroll for 35 years in order to fund a transition to a privatized system. Ironically, this payroll tax increase is larger than that needed to satisfy the long-term Social Security shortfall we now have-estimated to be 2.19 percent of taxable payroll. In short, simply increasing Social Security payroll taxes 1.1 percent on both the employer's side and the employee's side is both less costly and less risky than privatization.
The Tax Cap Secret
There is a simple way to solve the so-called "Social Security crisis" that does not involve cutting benefits, spending trillions of dollars in transition costs, or asking 130 million Americans to speculate in the stock market. It involves raising the Social Security tax cap.
The secret of the rich and powerful is that most of them stop paying Social Security taxes before the end of the year. Under current law, all Social Security taxes for the year stop after an individual crosses the salary income threshold of $68,400 (for 1998). No other tax stops altogether when you make more money-not even Medicare.
The result is that a worker earning $35,000 a year pays Social Security taxes all year long while his boss-making $140,000 a year-stops paying Social Security taxes by the first of July and gets a 6 percent raise for the rest of the year!
Opponents of raising the Social Security tax cap make three arguments. The first two are that it would be "unfair" to raise the cap without raising benefits, and that raising the Social Security tax cap would garner too much opposition in Congress.

Nonsense.
In 1993, the Medicare tax cap was completely eliminated without increasing benefits at all. Not only was the change politically palatable, it was accomplished with only the barest notice or comment! This is not to say that raising Social Security benefits for the well-to-do could not be accommodated in conjunction with elimination of the tax cap. In fact, such a compromise is possible by simply adjusting the current Social Security benefit formula.
The third argument-that raising the Social Security tax cap doesn't raise enough money-is perhaps the easiest to refute. The Social Security Administration calculates that if the Social Security tax cap were eliminated entirely (as was done for Medicare) Social Security could remain solvent forever after factoring in the changes to the CPI previously mentioned. If a more modest change.was made, and the Social Security taxable base cap was removed on the employer's side alone, and the CPI changes were also made, almost 70 percent of Social Security's long-term actuarial deficit would disappear.... That is, if there is a deficit at all.
The Bottom Line
Ironically, as political momentum for a "tax cap solution" begins to gain momentum, the barons of Wall Street may decide there's no Social Security "crisis" after all. Wall Street is hoping to raise support for mandatory private investment in stock and bonds. The last thing Wall Street's wealthy want is to be asked to do their duty to keep the national social insurance system solvent.
In the Social Security debate, as in so many others, where you stand on the issue may depend on where you sit. And if the past is prologue, Wall Street's wealthy intend to sit on their wallet. It's a plan of attack the rest of us might do well to follow.