Scrap the Cap, Strengthen Social Security

When Sen. Tom Harkin (D-IA) called for "raising the cap" on Social Security's taxable wage base [1] at a "Back Off Social Security" rally and press conference a week ago, he elicited roars of approval and chants of "raise the cap" from the hundreds-strong crowd. But if, as Sen. Harkin noted, the cap is fundamentally unfair, then why was it even created? And would raising the cap alone solve Social Security's projected long-term shortfall? What about scrapping the cap altogether?

Sen. Tom Harkin (D-IA) speaking about the cap on Social Security's taxable wage base at the "Back Off Social Security" event on the Hill on March 28th. "Why is it that a factory worker making $50,000 pays the payroll tax on 100 percent of her income, while a banker making $500,000 pays the tax on only the first $106,800, just 21 percent of his income? Let's raise the cap!" Harkin proclaimed.
Photo Courtesy of Ellie van Houtte [2].

First, it is worth providing a brief description and history of the "cap" on Social Security's "contribution and benefit base," also known as the "maximum taxable wage base." Social Security limits the amount of earnings subject to taxation through FICA contribution, and in turn, the base upon which an individual's benefits are calculated. When the program was created in 1935, the maximum taxable wage base was $3,000, which covered 92.5% of all earnings paid to workers covered under Social Security. (For more on the history of the cap see Nancy J. Altman's invaluable history of the program, The Battle for Social Security: From FDR's Vision to Bush's Gamble [3], from which I have mined the above information on the history of the cap.)

The cap increases annually with the Average Wage Index (AWI), which reflects the average growth in the country's wages. Legislation passed in 1977 instituted periodic increases in the cap that were meant to insure it would cover 90% of the country's earnings. By 1983, the last time Social Security was reformed to account for financial and demographic realities, the cap covered 90% of earnings.

At the time it was created, the logic behind the cap was that wages above a certain level represent the earnings of the wealthiest Americans, and thus need not be insured by Social Security. Capping the wage base was intended to prevent a situation in which the government would be obligated to pay benefits of, say, millions of dollars to the country's billionaires. It also was meant to ensure the richest Americans' support for the program by exempting them from being taxed on wages they had no interest in insuring. All told, it has largely succeeded in both of those goals.

But even as it has served its purpose, the cap has created a situation that many Americans would consider unfair (if they even knew it were the case). Today the cap is at $106,800. That means that no matter how rich you get, you only have to contribute FICA taxes on the first $106,800 of your earnings. Middle class people pay 6.2% of their income to the program, and the rich pay a fraction of that amount on theirs.

In addition to its unequal nature, in recent years, the cap has covered a diminishing portion of country's earnings, putting it under sharper scrutiny from the same crowd that once tacitly accepted it. Since 1983, average wage growth has been skewed by disproportionate increases in the wealthiest Americans. Growth in the AWI has not reflected widespread wage increases. As a result, the cap now only covers 85% of earnings and is projected to cover 83% in the coming years.

This would be less of a problem if there weren't extraordinary political pressure for major benefit cuts in order to shore up Social Security's finances. If the choice is between scrapping the cap and benefit cuts that would have a comparable financial impact, advocates reason, the right choice is clearly the former. What's more, depending on how it is done, scrapping the cap could provide enough revenue to actually increase benefits.

In fact, many progressive Social Security advocates who are opposed to benefit cuts of any kind, have already endorsed scrapping the cap, in whole or in part. Rep. Jan Schakowsky's reform plan [4] relies on both lifting the cap to 90% and scrapping it entirely on the employer side, provisions that would eliminate nearly three-quarters of the shortfall. (It should be noted that Bob Ball, the father of modern Social Security, favored such an approach, [5] in conjunction with several other measures.) Rep. Ted Deutch has proposed a plan that would scrap the cap entirely [6], while providing only very modest benefits on earnings above the current cap. Those components of Deutch's bill, the "Preserving Our Promise to Seniors Act," would make Social Security solvent for the next 75 years, and then some.

Poll after poll shows that vast majorities of the American public support getting rid of the cap entirely, an approach that would align them with Rep. Deutch. Nearly two-thirds (66%) of Americans support scrapping the cap on both employers and employees [7], including 59% of Republicans and 60% of Tea Partiers, according to a poll done by Lake Research Partners.

What opponents of benefit cuts need to be wary of is deficit hawks treating a half-move like restoring the cap to cover 90% of earnings like a significant concession that gives license to major benefit cuts. For the center-right Bowles-Simpson [8] and Rivlin-Domenici [9] plans, which would fill Social Security's shortfall through two-thirds benefit cuts, lifting the cap to cover 90% of earnings is the one-third of their plan that would increase revenue. That this counts as a "balanced" plan is pathetic. We must make clear that raising the cap so that it covers 90% of earnings is the bare minimum. Because it would only serve to restore the cap to what it was intended in 1977, raising the cap to cover 90% of income does not constitute a compromise to the Left deserving of reciprocation in the form of benefit cuts.

Finally, for progressives, the question remains: How committed should we be to the original purpose of the cap, which is to prevent Social Security from either paying too much in benefits to the rich, or demanding too much of them in taxes? Personally, I think Rep. Deutch's "Preserving Our Pomise to Seniors Act" [6]strikes the proper balance by preserving the link between benefits and wages. (Although I work for Social Security Works, the views presented here in no way represent the views of the organization.) Under Deutch's plan benefits would replace 3% of earnings between $106,800 and $250,000, and 0.25% of earnings above $250,000. The best part is, counting that portion of the new earnings toward benefits comes at a negligible cost.

Besides, the political risk of taxing the rich on all of their income is belied by similar changes to Medicare taxes. The cap on taxable wages Medicare Part A was removed back in 1993, [10] and thus far, it has gone largely unnoticed.

Scrapping the cap is not perfect. For those earners immediately above the cap, it may prove to be a difficult adjustment. There are also other more progressive ways of generating revenue for Social Security, like dedicating a portion of the estate tax to Social Security, or taxing unearned income. (And to be fair, Rep. Schakowsky and others who support raising rather than scrapping the cap, propose other progressive methods of increasing revenues.) But scrapping the cap is the most popular because it would restore the principles of fairness that Americans hold dear. No one should pay taxes on a smaller portion of their income just because they are rich. As Tom Harkin asked, with indignation that spoke for the frustration of a recession-battered workforce, "Why is it that a factory worker making $50,000 pays the payroll tax on 100 percent of her income, while a banker making $500,000 pays the tax on only the first $106,800, just 21 percent of his income?"

It is unlikely that any Social Security reform proposal that consists purely of revenue increases will be seriously considered in the current political climate. A campaign to "Scrap the cap" may be the only one that has a chance. At the very least, it will help let the public know that benefit cuts are not necessary. So, for now, at least, "scrap the cap," should be our rallying cry.