Removing the Payroll Tax Cap & other Social Security Proposals

policiesIn January Rep. Reed began his campaign to “Save” the Social Security System. He attacked the Social Security Disability Insurance (SSDI) by calling it a “failed program.”  Pulitzer Prize Columnist Michael Hiltzik of the Los Angeles Times responded:

“In the first place, SSDI is not “a failing federal program.” It does exactly what it’s supposed to do, which is provide sustenance for people who are too physically or mentally impaired to perform “substantial gainful activity,” defined as the ability to earn $1,090 a month ($1,820 for the blind).”

Hiltzik has also commented:

“Social Security’s disability standards are stringent. To be eligible you must have worked at least one-fourth of your adult life (typically from age 22 on), and been employed in at least five of the previous 10 years. Children qualify under Supplemental Security Income, and workers younger than 31 have to show employment in half the years since they turned 22.”

Rep. Tom Reed’s plan  is to reduce the number of people who are eligible to receive the Social Security Disability Insurance by limiting it to workers “with genuine “catastrophic” disabilities, those who “can’t find a job anywhere in America because of that disability.” The disabled Americans who are not catastrophically disabled will be dropped from Social Security Disability Insurance and placed in a different (new?) government program that helps them find jobs.

Rep. Reed is not the first person to contemplate ways to  improve the Social Security System; there have been many. The difference is that Reed focuses only on the Disability Funds  and has it competing with the Retirement Funds. Others view it as ONE SYSTEM. The deductions from our pay goes into one fund, which is then divided up by Social Security Administration according to a formula dictated by law.

The following are options that have been debated as ways to “improve” the whole Social Security System:

The proposal that has probably been brought up most frequently is to increase the Payroll Tax Cap. Presently 6.2 percent of our salary goes to towards our benefits. Currently the 6.2 percent Payroll Tax applies to annual earnings up to  $118,500. Any wages earned above that amount go untaxed for Social Security. That figure is adjusted yearly for inflation. All earnings above that amount is not taxed. According to an AARP article, “One commonly mentioned goal would raise the cap to cover 90 percent of all earnings,” which would mean to raise it to $230,000. Only 6 percent of workers earn more than that.

Coupled with increasing the tax cap, is the idea of removing the cap entirely. That would mean that every dollar earned would have 6.2 percent deducted for the Social Security System.  This topic came up at  Rep. Reed’s Town Hall Meetings in Prattsburgh (Steuben County) in February, 2014, and surprisingly he said that he supported it. Then, as a true politician, he explains why it is not a good idea.

Q: What are your thoughts on removing the income cap?

Reed: Yes, I’ve been supportive of that.

Q: You have?

Reed: Yes, I have. Everybody know what we are talking about? When you remove the $106,000, it’s now $109,000 because it is a new year (Feb 2014). When you remove the cap, that means  right now everybody up to $109,000 of wages they contribute to Social Security. Anybody above that amount doesn’t contribute any further amount. They pay up $109,000 and nothing else. Why is that? Because they limit their benefit based on $109,000 worth of contributions. OK?

Then Rep. Reed begins to explain why it is not a good idea to remove the cap.

When people talk about raising the “Cap” you also need to have the conversation how are you going to adjust the benefit for people. Because you may be able to remove the cap, and this is where a lot of people want to go. Remove the cap, and if you don’t adjust the benefit—take it to the extreme—someone is making $100 million a year and they are contributing money into Social Security at $100 million a year. What’s going to happen if you don’t change the benefit calculations? That person is going to get $100 million out of Social Security. Because Social Security was designed you contribute in your money  and you get your money back out. Right? The reason that we have the benefit conversation needs to be in the equation is because if I contribute $100 million today but 15 years from now I have to pay out $100 million, have you really solved the problem? You haven’t because money went in, you’ve created a liability and—garbled sound—. Some people who don’t talk about removing the benefit calculation, not adjusting the benefit calculation accordingly, the benefit  that you get a $100 million today, so you contribute a lot of money into social security, but it is robbing Peter to pay Paul. And that is not a long term fix. (You can see this clip on Youtube.)

If it is not a long term fix, why would Rep. Reed support it? If he supports removing the cap, why does he explain that it doesn’t work? Spoiler Alert: Maybe he wants to have it both ways.

David John, of the conservative Heritage Foundation does not like the idea of removing the tax cap, but not for the same reason as Rep. Reed. In the AARP article, he said:

 If millionaires pay Social Security taxes on all of their salary income, the maximum annual benefit payment could reach over $150,000 a year. This development would not bankrupt the program, but it would change its nature. Social Security was not intended to provide such large benefits.

Our Social Security System has changed with needs of society. Removing the Payroll Tax Cap would not only increase its revenue, everybody would be paying the same rate into the System. Presently those earning over the Cap is paying a lower rate than those earning the lowest amounts.

Social Security Works has information about  Removing the Payroll Tax Cap (or “Scrap The Cap” as they call it). They have a PDF article, “Scrap the Cap: Strengthening Social Security for Future Generations” and a “Just Scrap the Cap (We’re Moving In)” two-minute music video.

Another way of firming up Social Security System would be to gradually raise the tax rate. If we raise the 6.2 percent payroll deductions to 6.45, a $50,000 salaried worker would pay $175 more a year. Slowly increasing the rate to 7.2 percent in 20 years would keep the funds viable for a long time.

Some state and local governments have opt-out of the Social Security System. They provide their workers with a lucrative retirement plan. Those employes and the government do not contribute to the Social Security funds. A plan has been proposed to begin having  newly hired government employees become part of the Social Security System. This would not affect those already in the local government retirement plans. The Federal Employees went through the same process in 1983.

Virginia Reno of the  National Academy of Social Insurance, agrees with this plan. She said in the AARP article:

 Social Security works best for everyone when it covers everyone. Workers gain seamless, portable life and disability insurance as well as basic retirement income protection.

There are many other ideas about improving the Social Security System.  Some plans, such as Rep. Reed’s, starts the steps to destroy it. The Social Security System is too important to  too many people to destroy it. Remember at the beginning of the Bush Recession of 2008, some financial institutions were “Too Big To Fail”? Well, many would agree that Social Security is “Too Big To Fail” too.

Real change to the Social Security System takes cool heads and time to shift through the many options. Changes should not be decided quickly while facing a mid-August, 2016 Disability Fund Crisis deadline.  A Presidential Campaign, along with one-third of the Senate and all of the House members in campaign mode could complicate any last minute Social Security System negotiations.   President Obama’s plan to boost Social Security, the one that President Reagan used three times in the 1980’s, to reallocat revenues to make both funds viable, would provide time for Congress to have in-depth negotiations. Rep. Reed’s House Rule amendment forbids this common sense reallocation  from happening.

Note: I used the AARP article, The Future of Social Security: 12 Proposals You Should Know About, for much of the information in this post. To find out more about those proposals you can read the article here.

U.S. News and World Report has an article “5 Potential Social Security Fixes

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About pystew

Retired Teacher, political science geek, village trustee. I lean a little left, but like a good political discussion. My blog, the New NY 23rd (http://newny23rd) is about discussing the issues facing the people of our new congressional district. Let's hear all sides of the issues, not just what the candidates want us to hear.
This entry was posted in 2016, Congress, Constituents, Constitution, Economics, Ethics, Reed's Views, Seniors and tagged , , , , . Bookmark the permalink.

10 Responses to Removing the Payroll Tax Cap & other Social Security Proposals

  1. whungerford says:

    Tom Reed claimed: Anybody above that amount (the cap) doesn’t contribute any further amount. They pay up $109,000 and nothing else. Why is that? Because they limit their benefit based on $109,000 worth of contributions. OK? Social Security benefits are based on earnings, and benefits are limited, But Reeds implication, that if the cap on payroll taxes were increased or removed, benefits for high earners would necessarily increase unreasonably is duplicitous. Perhaps Tom is concerned that a dysfunctional Congress would be unable to make even a minor technical change to the formula for computing benefits.

    Reed goes on to explain: Because Social Security was designed you contribute in your money and you get your money back out. Right? Reed’s claim that individuals receive in benefits what they contribute is wrong–Social Security is insurance not a savings account.

    Tom has claimed that Social Security is unsustainable, that America can’t afford a dignified retirement for all. This belief may explain his evident hostility toward Social Security and other government programs which benefit the public.

  2. josephurban says:

    You make 2 very good points. I wonder if Reed is really ignorant about how SS works or if he is intentionally dishonest? And which is worse?
    There is nothing preventing Congress from ending the cap on income that is taxed for SS benefits. Nothing.
    And there is nothing preventing Congress from imposing means testing for receiving benefits. Nothing.
    Those two simple fixes would go a long way to shoring up the system,. Without reducing benefits for those who need SS to supplement their retirement.
    The intentionally misleading proposition that SS was ever an individual savings plan has been the main talking point of the opponents of FDR for some time now. And the Democrats have done a very poor job of challenging that lie.

  3. Deb Meeker says:

    Maybe the way it was explained to Tom Reed was oversimplified and cautiously erroneous so he could understand just enough to attempt to speak about it?
    Tom Reed sits on the following US House Committees:
    Committee On Ways and Means
    Subcommittee on Human Resources
    Subcommittee on Oversight
    Subcommittee on Select Revenue Measures
    Surely someone in one of those committees could have prepped him better than this.

    I dare say I disagree with Social Security taxes being raised on working people, especially without collecting appropriate corporate taxes, and unearned income being offshored without benefit of being taxed first.
    There are no incomes to tax or preserve in SS and SSDI – without the workers of the US. Time to honor them and the promise of at least a minimum of security when their work is done.

  4. whungerford says:

    I don’t favor a means test which would convert SS from insurance into welfare. For the same reason, I wouldn’t oppose increased benefits for high earners in exchange for raising the tax cap. At the very least, the increased benefits would be subject to income tax.

  5. Here is the rub: Conservatives do NOT differentiate between wages earned from labor and the nonworking incomes of millionaires who earn their money from investments. Obviously, those who do not work would not be paying into social security. Unfortunately, Congress would then have to pay into it if there were no cap ($174,00 a year) and Jeepers, we just can’t have that. Meanwhile, the “cap” is arbitrary and has no basis in anything. I say, ALL wage income from labor should have to pay into the fund regardless if you are a CEO making millions. They are only human and should contribute to the insurance fund to spread out the risk by God.

  6. whungerford says:

    Social Security is a very conservative retirement insurance plan. Participants and their employers pay on average in premiums for every dollar of benefits. Yet this is a strength–if Social Security were seen as a government handout to seniors, it might not have endured as long as it has.

  7. josephurban says:

    Why should only the taxes on labor income go into the fund? Why not taxes on corporate income, as well? After all, the SCOTUS has ruled that for other purposes of government that corporations are persons under the law.

  8. whungerford says:

    According to Tom Reed’s explanation, if corporations paid SS taxes, they should be eligible for SS benefits.

  9. josephurban says:

    I agree. As long as they put in means testing.

  10. Pingback: NY 23rd Residents Receiving Social Security Benefits by Counties | New NY 23rd

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