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Mmm...wonky goodness

Plumer dives into the crunchy, delicious details of lifting the FICA cap:

There are two ways to lift the wage cap for payroll taxes. The first would subject all income to payroll taxes, but also raise benefits for high-income earners (since all of their lifetime average salary would be used to calculate payouts, rather than merely the first $90k). That approach is somewhat "fairer," but it only fixes about 88 percent of the projected 75-year Social Security deficit. The alternative is to lift the cap but still calculate benefits using only the first $90k of salary. That method fixes Social Security completely, but does broach some fairness issues.
Matt says...split the difference! You completely uncap FICA for both payment and benefits-calculation purposes. But for all income above, say, $70k apply the dread price index instead of the enticing wage index. You could even put in an intermediate range of some kind where benefits were calculated by an in-between index. Although of course you would want the precise numbers to be worked out by someone who can do the math and make the money balance in the end rather than someone who's just pulling things out of his ass. But the general point is clear. What no one wants to say, however, is that Social Security really ought to be made more generous for certain classes of people. Doing that and bringing it into long-term balance is hard and requires Diamond/Orszag Power.

February 10, 2005 | Permalink

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Comments

Again, Matt:

9/11.
WMD's in Iraq?
A non sequitur.

Security for America's seniors.
Private accounts for Social Security?
Another non sequitur.

Addressing these subjects at all is unserious.

Posted by: epistemology | Feb 10, 2005 12:58:40 AM

As a limousine liberal, I don't understand why the FICA cap is such a third rail. Say my salary was a million dollars, a figure not unheard of in Manhattan. Why should less than 10 percent of my income be taxed for Social Security when the person who cleans up my office has 100 percent of it taxed?

I might also add that, as salaries start to get higher, rich folks who are not boxers or Willie Nelson generally start their own personal private freedom jesus retirement accounts or whatever it is we're calling them these days.

Posted by: Delicious Pundit | Feb 10, 2005 1:03:39 AM

This is wonky.

We don't need no stinking FICA. We could just fold moneys for old age retirement into the general fund, like paying for roads, farm subsidies, the military, etc.

Posted by: epistemology | Feb 10, 2005 1:08:50 AM

"Matt says...split the difference!"

No need.

By fixing 88% of the 75 year gap, even if economic growth is as anemic as the SSA's projections, SS will still pay upwards of 95% of promised benefits in 2042. If that's the situation we find ourselves looking at in 2037, the necessary adjustments will be incredibly mild.

-----

If you had asked me a year ago, I would've said to lift the payroll tax cap without adjusting benefits for the wealthy in the least.

For a very long time, making SS a more progressive program has been high on my wish list. But the current fight on SS has taught me a few things, and I've partially changed my mind.

I've seen that the non-progressive nature of SS has given the program immunity to being classified as a 'welfare program', and greatly strengthened it politically. I've learned that FDR and his advisers wrestled with this issue at length in creating the program, and had good reason for not making it progressive.

I'd say it's wise to not tinker with the non-progressive nature of SS, and instead use the progressive general fund to implement lefty policy goals. This would all argue for only lifting the payroll tax cap if you also equivalently raise the benefits to the wealthy.

Posted by: Petey | Feb 10, 2005 2:12:10 AM

I'm just sick of the whole CEO supremcist/ supply side economics of the GOP. Privatization will cost more than fixing the current system but whatever wall street wants wall street gets

Posted by: jr | Feb 10, 2005 3:42:38 AM

I agree with Petey, but still, capping the benefits might be a good thing. If the cap is high enough it could, paradoxically, help the perception that the program is fair and sane; i.e. Bill Gates will not be getting tens of thousands dollars he doesn't need every month.

Posted by: abb1 | Feb 10, 2005 4:52:07 AM

"more generous for certain classes of people"

Viz, the median income family on about $40,000 a year.

If you want more free trade, and understand that more compensation for losers is part of the deal, raising the pension amount that normal families get from the government is an obvious way to do this.

Posted by: Otto | Feb 10, 2005 7:57:20 AM

This is good. Seize the initiative. Embrace the current effort to “fix” Social Security, and take football from the Republicans and run with it. Social Security belongs to the Democratic Party; don’t allow the Republicans to appear as the good guys offering hope to future senior citizens. There is a much a hidden agenda in the Bush’s fix for Social Security as there was in the run up to the Iraqi War -- and just as much after thought.

The fall of communism and the winning of the Cold War proved that free markets perform better than planned economies. There is merit in a free market approach to Social Security. But, Social Security is a safety net not only for seniors but for the economy as well, and that should be protected.

Don’t fight the fix. Welcome our Republican brothers into the fold of concern for seniors and those unable to care for themselves. Of course we will be excluded, but hey, we tried. Let the party of inclusion be rejected by the party of exclusion.

Posted by: scou29c | Feb 10, 2005 8:06:00 AM

Petey:

The SS system is progressive, but the progressivity is cleverly hidded from view in the benefit formulas that the general public is unaware of.

Why try to by "fair". Fairness, like terrorism, is in the eye of the beholder. Just eliminate the cap and don't bother th mention that high income people will get no benefits for their taxes. No on will notice.

Posted by: Robert Brown | Feb 10, 2005 8:09:58 AM

"The SS system is progressive, but the progressivity is cleverly hidded from view in the benefit formulas that the general public is unaware of."

The progressivity of SS is pretty minor and gentle, mainly providing a small boost for folks at the bottom end of the benefit ladder.

"Why try to by "fair". Fairness, like terrorism, is in the eye of the beholder. Just eliminate the cap and don't bother th mention that high income people will get no benefits for their taxes. No on will notice."

You might well be right. But I worry that with all the light shining on the issue right now, folks will notice. And I worry that once noticed, the issue will keep getting raised year after year.

SS only works if the program can survive for generations. Designing the architecture is like designing the Yucca Mountain nuclear waste repository. Anything that might weaken support a generation down the road makes me nervous.

Posted by: Petey | Feb 10, 2005 8:17:35 AM

scou29c:

The SS private accounts are clearly part of a Republican strategy to get labor interested in the ownership of the companies they work for. Thus giving them an interest is seeing their employer prosper.

Democrats rely on driving a wedge between labor and capital, labor and management and fostering anamosity between the groups to retain their political power. I'm sure the Rs think if they can get labor and capital cooperating with each other they can chip away at the Democratic power base.

Posted by: Robert Brown | Feb 10, 2005 8:25:55 AM

Determining the top part of benefits based on the price index is unfair to younger, wealthy-some-day workers (or, hopefully, my toddlers). They are the ones whose benefits will erode.

Rather, just determine the break-even point where benefits are capped. So, all wages would be subject to FICA, but benefits would be capped based on a $150k/yr salary (or whatever the math works out to).

Posted by: American Citizen | Feb 10, 2005 8:30:44 AM

The SS private accounts are clearly part of a Republican strategy to get labor interested in the ownership of the companies they work for. Thus giving them an interest is seeing their employer prosper.

Funny, I thought that it was an employer's job to make sure that their employees had an interest in seeing the company prosper. Big Business wants the government to do its own job of keeping workers in line. Is this what happens when the CEO class becomes so powerful they start seeing the government as their own collective company?

Posted by: Rambuncle | Feb 10, 2005 9:21:29 AM

How is it that Matthew supports fixing Social Security but has failed to give all of his money to the elderly? What a Chicken-Social Security-Hawk!

Posted by: Al | Feb 10, 2005 9:49:02 AM

Petey: "The progressivity of SS is pretty minor and gentle"

Hmm...according to my handy benefit calculator a worker earning $80,000 pays 14.3% more in taxes for a 6% increase in benefits over someone earning $70,000. Is that "minor and gently"? Depends on your point of view I suppose. But I bet most people assume that everyone gets the same proportion of what they pay in.

It is interesting that the success of a massive program like SS is so dependent on clever deception of voters. An odd position for the "reallity based community" to be in.

Posted by: Robert Brown | Feb 10, 2005 9:57:58 AM

It would be far, far beter to raise the funds we need by increasing the top rate of the income tax than by raising the Soc Sec. tax threshold. But if we do raise the threshold we have to provide increased benefits.

Why? The Soc Sec tax captures only wages.

What does that mean? First, it means that people whose wealth is truly astonishing and farthest out of line with their contributions to society will get off easy: people whose incomes come from such things as trust funds, stock options, and real estate holdings. These are the fabulously wealthy, and income from their assets will not be taxed by raising the Social Security threshold.

This means that we significantly reduce the revenues available for capture. It also means we will hit the upper middle class much harder, and in particularly we will penalize work to the advantage of wealth. Just about every successful doctor, lawyer, small businessman, and middle manager is going to get hit very hard -- by a seven percent increase on income above the threshold, with NO deductions. Fortune 100 CEOs, meanwhile, will see a much smaller percentage increase. What would John Edwards say?

I would add that structuring the tax this way will also hit urbanites (whose incomes are higher) and blue state residents (whose incomes are higher) much harder than rural, red-state voters. So, to cite another politician, what would Karl do?

I'd say at a minimum that if you lift the threshold you had better increase benefits for these folks, or you will create a very hostile group of highly motivated and powerful people.

Second, and far better, raise the top rate of income taxes. the real problem with Social Security is that the budget is out of balance. Far, far better to raise that money with a tax that doesn't target

Posted by: TedL | Feb 10, 2005 10:01:50 AM

A big piece of SS payouts are for hardship cases like my brother, who is profoundly retarded, can't talk or walk, is on a feeding tube, etc, and of course he never put a dime into SS. It is unfair that only low and middle income wages and salaries contribute to his support.

I say uncap a portion of SS contributions represented by the hardship percentage (about 30%, I think), and don't include this in retirement payment calculations.

Posted by: ESaund | Feb 10, 2005 10:03:08 AM

Rambuncle : "Funny, I thought that it was an employer's job to make sure that their employees had an interest in seeing the company prosper."

Yes, of course, and Republicans generally side with business. It is in the Democrates interest to convince workers that the success of their employer is not relavent to their interests an that they should turn to government to impose living wage mandates and price controls, ect to improve their lot in life.

Posted by: Robert Brown | Feb 10, 2005 10:13:30 AM

Numeracy please. Raising the cap or extending FICA to all income has the same effect as repealing the Bush tax cuts and adding a bump. That is a political non-starter. Now as an attempt to fix the genuine general fund deficit, then maybe, but the odd notion that the wealthy as a class are concerned enough about working and middle class seniors that they will gladly accept a 6.2% (or 12.4%, depends how they structure it) tax increase is not just wonkery, but Ivory Tower wonkery. We are the reality-based community, time that we started acting like it.

Petey has the right idea for the starting point. Every penny of the Trust Fund is money from workers, it's our money, Capital and Wall Street have exactly zero moral claim to get involved. And absent "Crisis" that point could be driven home. Which is why all this talk about raising the cap, bringing other income sources on line, or the benefits of stocks over bonds completely obscure the real issue here. Take this quote.

"That approach is somewhat "fairer," but it only fixes about 88 percent of the projected 75-year Social Security deficit."

Who is projecting that deficit? And on what economic numbers are they basing it? Given the proven Bush Administration pattern of lying in all realms: WMD, the real cost of the Medicare drug plan, keeping Iraq war costs off budget, etc, why are we agreeing to use the Intermediate Cost projections of the 2004 Social Security Report as the baseline for argument? In doing so you are committing the same sin as those who reluctantly supported the war because everyone "knew' Saddam has WMD. Well everyone didn't "know" and some were willing to challenge that "fact" is real time before the war. And I am throwing down a similar challenge. You are being lied to, by the same people who lied to you before. Every single time you allow a person to deploy a number that derives from Intermediate Cost (and every number cited out there does directly or indirectly: 2018, 2042, 88%, "whole gap") without challenge or qualification you are agreeing to all the assumptions of the Social Security Trustees that underlie it.

Until and unless you force privatizers to replace 2.7% productivity growth for 2004 with the real world 4.0% and make them recalculate their tables, you are participating in a huge fraud on the American people.

Matt put up a link to a really good resource but hasn't yet taken its message to heart http://www.tcf.org/4L/4LMain.asp?SubjectID=1&ArticleID=509 . Download the associated PDF and read it. It's important for everyone to internalize the reality that given ordinary economic growth the Trust Fund is fully funded.

We have won the war. At least the one that is based on real world economic numbers. Why are we still skirmishing on enemy grounds? Download the PDF or follow the links on my website, or visit the Economics Policy Institute (Sawicky) or the Center for Economic and Policy Research (Baker and Weisbrot). And if you don't know who those people are, or what the significance of the names DeLong and Samwick are in this context, then you are indulging in the equivalent of barroom talk, a lot of Sound and Fury, Signifying Nothing.

Posted by: Bruce Webb | Feb 10, 2005 10:14:08 AM

"Who is projecting that deficit? And on what economic numbers are they basing it?"

Those numbers are projected by the SSA.

They are truly non-partisan numbers, but have rather conservative future growth estimates. The SSA has a history of always underestimating future growth.

"It's important for everyone to internalize the reality that given ordinary economic growth the Trust Fund is fully funded."

Agreed entirely.

Posted by: Petey | Feb 10, 2005 10:22:15 AM

Bruce Webb,
I am certainly no political strategist, but a focused effort on the general fun deficit and the general sluggishness of the economy (especially jobs) it might be good to high light Bush's failures by advocating a return to surpluses by restoring the Clinton tax sructures, combined with a coordinated campaign to raise the cap while keeping benefits the same might not be a bad plan. Bush has certainly benefitted by moving the goalposts and then offering a compromise in the middle.

Posted by: theCoach | Feb 10, 2005 10:46:07 AM

It seems that the real political inertia against dramatic cap changes would come from the employer side. People earning more than the cap might be willing to pay more but the people paying more than the cap aren't going to want to match.

Posted by: ficalmatter | Feb 10, 2005 11:11:41 AM

Matt Yglesias, trying to destroy SS one post at a time.

Posted by: Chad | Feb 10, 2005 11:37:19 AM

If you lift the cap completely, it really does stop being a social insurance program and start being an entitlement program. I'm not comfortable with that.

Posted by: Kimmitt | Feb 10, 2005 12:01:29 PM

Speaking of wonky goodness, here's something I've never seen mentioned before that's nagging the hell out of me. According to the Cato Institute, here's how social security survivor and disability benefits would be taken care under a private accounts regime:

"A small part of the funds in your private investment account would be used to purchase private life and disability insurance covering at least the same survivors (pre-retirement) and disability benefits as Social Security."
http://www.socialsecurity.org/reformandyou/faqs.html#7

If I'm reading this right, then it appears that part of the whole Social Security Reform plan (at least as envisioned by Cato) is to essentially privatize the survivor and disability insurance aspects of Social Security. To do this, the investment management company overseeing that private account you "own" will take a "small amount" of money from it and buy private life and disability policies for you. Helpfully, Cato provides absolutely no further information about how much such policies might cost and what type of coverage or benefits they might provide.

This seems like sort of a big deal to me, but I've never seen it discussed anywhere. Any thoughts anyone?

Posted by: pat m. | Feb 10, 2005 12:02:51 PM

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