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There's Nothing Wrong with Social Security that Taxing the Rich Fairly Wouldn't Fix

New York Times columnist and economist Paul Krugman, in his column today, is right to expose the attacks on Social Security as being the work of right-wing ideologues eager to destroy a government program that works, backed by cowardly Democrats who want to show their fiscal “responsibility” by getting tough with future pensioners.

But he doesn’t go the extra step to point out that this program, founded 75 years ago as a cornerstone of Franklin Roosevelt’s New Deal, could be much more fair and even generous to elderly and disabled retirees, and also placed on a much sounder economic footing, by a few simple reforms that would not cost most people a penny, or require hard working folks to work one day longer before retiring.

There is a problem facing Social Security, which Krugman doesn’t mention. The Nobel economist is correct that the system has built up a huge multi-trillion-dollar surplus over the years. And he is correct in noting that this surplus--the Trust Fund--is big enough to fund the system probably indefinitely, even during the huge bulge in retirement that is starting now that the Baby Boomer generation is hitting retirement age. What he fails to mention is that the Trust Fund has all been stolen (okay, technically borrowed) by the federal government to fund its own annual deficits, and given the national attitude towards taxes, it will never be repaid. That’s why the right is able to create a panic by falsely claiming that Social Security is going to go “bankrupt” when current workers’ Social Security taxes can no longer pay for the benefits of current retirees.

But there is a simple solution to even this deception, which is to eliminate the cap on income which is subject to the Social Security tax.

At present, every worker in America pays the same percentage of income into the Social Security Trust Fund--currently 6.2% of the first $106,800 of earnings. Since everyone pays at that rate, whether they earn $10,680 a year or $106,800 a year, that would be a flat tax, except that it’s not. Because once someone earns more than $106,800 in a year, the tax rate falls off precipitously. After that cap, which is adjusted upward a little bit each year to account for inflation, there is no SSI tax on additional money earned. In other words, if someone earns $106,800.00, she or he pays $6,621.60 into the Trust Fund, but if that worker earns $107,000, or $313,600 a year, the tax is still just $6,621.60. For the person earning twice the income cap of $313,600, that means an SSI tax rate of only 3.1%. For someone earning 10 times the cap, or $1.068 million, the tax rate is only 0.62%.

Making things even more unfair, if someone were to earn that $106,800, or any other amount, by investing in the stock market, or by investing in real estate, he or she would pay no SSI tax at all, since the tax is only applied to what is called “earned income,” not to investment income.

According to a recent study conducted by the Congressional Budget Office for the Senate Special Committee on Aging, if this income cap for the Social Security tax was eliminated, so that all earned income was taxed, the dreaded wall when current workers’ tax payments ceases to be enough to pay for current retiree benefits, instead of arriving in 2037, would be pushed back to at least 2075, a date almost as distant in the future as today is from the founding of the Social Security program.

story | by Dr. Radut