Social Security: Time to Uncap FICA...
8/19/09 12:35 PM
Grasping Reality with Both Hands The Semi-Daily Journal of Economist Brad DeLong: A Fair, Balanced, Reality-Based, and More than Two-Handed Look at the World J. Bradford DeLong, Department of Economics, U.C. Berkeley #3880, Berkeley, CA 94720-3880; 925 708 0467; delong@econ.berkeley.edu. Weblog Home Page Weblog Archives Econ 115: 20th Century Economic History Econ 211: Economic History Seminar Economics Should-Reads Political Economy Should-Reads Politics and Elections Should-Reads Hot on Google Blogsearch Hot on Google Brad DeLong's Egregious Moderation August 18, 2009
Social Security: Time to Uncap FICA... For nearly thirty years--ever since the Republican congressional barons of 1982 begged Reagan to allow them to increase taxes and then figured out that a tax increase that would "save Social Security" was one that he would accept--the rest of the federal budget has ridden on the back of Social Security and its operating surplus. Those days were coming to an end, and it looks like the magnitude of the current crisis means that that end comes... now. The Congressional Budget Office reports that the era of Social Security Trust Fund services is over:
The smart thing to do would be for congress this fall to (a) uncap FICA--apply it to all of wage-and-salary income rather than just the bottom 90%--starting in 2012 and raise the retirement age to 70 in 2030, thus hitting those born in 1960 and later (i.e., me). And then revisit the system in a decade and see what shape it is in. Adding-on some tax-preferred properly-incentivized individual accounts as an add-on, not a carve-out would be a good idea as well.
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Brad DeLong on August 18, 2009 at 08:41 AM in Economics, Economics: Fiscal Policy, Obama Administration, Political Economy, Political Economy: Social Security | Permalink TrackBack TrackBack URL for this entry: http://www.typepad.com/services/trackback/6a00e551f0800388340120a5584ec2970c Listed below are links to weblogs that reference Social Security: Time to Uncap FICA...:
Comments You can follow this conversation by subscribing to the comment feed for this post. Being a bit older than you raising retirement to seventy in 2030 wouldn't impact me and I currently plan on working until I'm 70, in any case. In a discussion with colleagues, I suggested raising the retirement age as one solution to the SS funding problems. A friend and colleague pointed out to me that college professors whose employment doesn't involve strenuous exertion may find this idea more agreeable than unskilled and semi-skilled workers. Certainly, I'm not sure I could meet the physical demands of the factory job that I had in my 20s. Perhaps this would work best if improved provisions for age related disability were included. Posted by: John Howard Brown | August 18, 2009 at 08:55 AM A Democrat supporting the slashing and bashing of Social Security. I find this post appalling. Posted by: anne | August 18, 2009 at 09:40 AM As a twenty one year old who is a lifetime from being a beneficiary, I am horrified at the thought of raising the social security age by five years. Millions of retirees depend on social security to get by. If uncaping FICA isn't enough to close the gap, then we need to create a payout scale based on need. It doesn't matter if it creates some skewed incentives, we don't have any other choice. Somewhere in some ancient, pre-Regan, part of American history, there was a belief that hard times ment you comfort the afflicted to make sure they got by. We pride ourselves on giving fair treatment to all, but when the going get's lean, we are supposed to make sure that everyone has enough before caring about equal treatment for all. It's not socialism. It's not even compassion. It's common sense. Social Security was the epitome of this, making sure those in great need wouldn't starve. The name is security after all, not pension. The equal treatment way to pay for Social Security is to roll back the benefits on everyone equally. The most fair way to do this would be to roll back the benefits on the baby boomers who depleted the treasury. But rolling back the benefits on the needy and less needy alike would be ripping the heart out of the program. If we reject what we are in favor of self-interest for all we should stop calling ourselves Americans because America is dead. Posted by: John Whitesell | August 18, 2009 at 09:48 AM John Howard Brown makes a good point. Posted by: Bernard Yomtov | August 18, 2009 at 09:50 AM What John Howard Brown said. As long as there are substantial numbers of people earning a living through physical labor, we can't go raising the retirement age any more than has already been done. It isn't like their bodies wear out more slowly nowadays. Posted by: low-tech cyclist | August 18, 2009 at 10:05 AM Why isn't it time to start redeeming the trust fund? Or was it all just a lie? Posted by: Doctor Jay | August 18, 2009 at 10:39 AM As someone who is 37 and earns half his income above the FICA tax cutoff, I take these proposals as a threat. I propose that you let me out. Keep all that I have paid to date and reduce the liability associated with me to zero. I'll never ask for a dime and you'll never come to me for another contribution to this scheme. Deal? Posted by: Bob the Builder | August 18, 2009 at 11:11 AM http://delong.typepad.com/sdj/2009/08/social-security-time-to-uncap-fica.html
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I like lifting the cap and have long supported it. I do not think that raising the retirement age to 70 is a good idea, even though I will likely be working until then and old enough no to be affected by your proposal. As John Howard Brown said, being a college professor (or other professional) is a very different thing from doing physical labor and many of those people are starting to break down by the time they are in their mid-50s. Posted by: DrDick | August 18, 2009 at 11:43 AM Look around, you won't find many 68 year old floor nurses or carpet layers or concrete finishers or asphalt rakers. Having managed orthopedic centers, I know many of them above start showing up in their late 50s with arthritis and of course scheduling their joint replacements. Having allowed Wall Street to repeatedly loot their DB and DC retirement plans, raising the retirement age lacks appeal. Posted by: save_the_rustbelt | August 18, 2009 at 11:52 AM Hey Brad, why limit it to wages and salaries? Why not on bonuses and stock options as well? They're paid at companies' discretion, and that discretion will be heavily used if the cap comes off. Posted by: David Yaseen | August 18, 2009 at 11:52 AM Lifting the cap would raise the top marginal tax rate by over 10 percentage points (it's not the full 12.4%, since you do earn some additional benefits for the extra taxes you pay). We can obviously argue technical points, but someone at the cap now (around $107,000) is already paying a 28% marginal income tax rate, plus 2.9% for Medicare, plus, say, 6% state income taxes -- so they're already at around 37% at the margin. Lifting the cap puts them upwards of 47%. Is it good tax policy for someone at that earnings level -- high, but clearly not super rich -- to be paying close to half their income at the margin in taxes? I personally just don't think so. Posted by: Andrew Biggs | August 18, 2009 at 11:58 AM I'm afraid I don't understand. In your first paragraph, you say that "the rest of the federal budget has ridden on the back of Social Security and its operating surplus". I read this as implying that the rest of the federal budget *should not* have "ridden on the back of" Social Security and its operating surplus. In other words, the rest of the federal budget should be in long-term balance. Yet your proposal to uncap FICA would end up with us in exactly the same situation -- Social Security's surpluses would once again enable profligacy in the rest of the federal budget. I cannot support this proposal without the following conditions: 1. We completely separate the Social Security revenues and outlays from the rest of the federal budge. 2. We construct the above separation such that there is absolutely no doubt that the Social Security Trust Fund is "real", and Social Security has the right to draw on it to pay benefits. Posted by: Steven Engelhardt | August 18, 2009 at 12:03 PM Without strong protections for older workers, raising the retirement age to 70 will cause a lot of pain. I lived through the era when you could lay off a senior engineer/researcher and hire two fresh out PHD's for less money. Prof, as an employee of the state of california, you know that if Cal could figure out a way to get rid of you they could hire a covey of adjunct profs. As stated above, our bodies are wearing out at the same rate as always but we are living longer. At almost 74 I am one of the lucky few who is still physically active and can put in a days hard work. That said that days hard work is punctuated by many periods of rest and recovery. If I remember correctly at 70 there were only a few less periods of rest and recovery. Posted by: dilbert dogbert | August 18, 2009 at 12:08 PM I once commented at Angry Bear that the solution to Social Security was to ask workers when they will retire. You know, take a representative sample of workers and ask them straight out, "When do you plan to retire?". It took me three posts of repeating the idea before the big advocates of Social Security understood, "Yes, just because we like government run programs does not mean that government bureaucrats cannot do marketing." It was a break through, I thought.
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So ask the workers, when is the best time to retire. Then use their answer to set the pay in and pay outs, as if workers had some special knowledge about their own plans. What a thought! If a bunch of use want to retire early with smaller benefits, then more power to us. Serfdom does not work, it is an economic model we bypassed three hundred years ago. Posted by: Mattyoung | August 18, 2009 at 12:13 PM Bob the B, No. You stay in. Period. Nobody likes to pay taxes. Nobody wants to live in the world we'd have if nobody paid taxes, but that doesn't stop people from trying to wiggle out. In the old days, the tax farmer would just keep beating the tax-avoider till he stopped avoiding. (No sexism intended. It would have been rare in most "tax farmer" societies for a woman to have been head of household.) No, we just reach into you electronic wallet and take the money. Principle is the same though. You need society, so society gets to tax you. Posted by: kharris | August 18, 2009 at 12:19 PM When SS was last reformed in 1983, the cap was set so that just about 90% of wage and salary income was subject to the text. The cap increases were tied to the growth in the median wage. Since that time, growth in the median has not kept pace with growth of the total, so only about 83% of wage and salary income is now subject to the SS tax. You don't have to uncap it completely; just adjust the cap so that 90% of wage and salary is covered. IIRC, that would (1) require raising the cap from $107K to about $120K this year and (2) push the point where current revenue does not cover current expenditures well past the end of the 75-year forecasts. Posted by: Michael Cain | August 18, 2009 at 12:30 PM Mattyoung...thanks for repeating your message at Angry Bear. Remember ours is volunteer work and we also have day jobs, so do not always see a point to be made the first time. Anne, I agree about the notion of again having social security under pressure when so many other things need heavy adjusting and are not on the table...Dems caving is not a good thought...so why is this being floated here?? Good question Steven on who floats whom in this game... Bob the builder...sure, never. and you will never be incapacitated nor need help...and will make sure in 30 years you keep your promise made today. SS is just insurance against what life may throw at you and puts a lean floor on poverty for many. John Whitesell...well bless you...economics is also about philosophy and morals, and we forget that or hide it under a thin veneer. Posted by: Rdan | August 18, 2009 at 01:18 PM Perhaps we charge FICA on dividends and capital gains too? Posted by: eak | August 18, 2009 at 03:07 PM Even as an engineer who sits at a desk staring at a computer screen for long hours, at 63 my eyes, head, general health, and energy are not what they were ten years ago. I used to be able to work all night on urgent problems, but now I physically hit a wall by 8 or 9 PM and can't think productively. Plus it seems tougher and tougher to take all the BS one gets at the working level - either there was a lot less of it when I was younger, or I was more of a naive good soldier then, probably both. Except for the every-changing computer systems, most of the good math and engineering stuff that I know I learned over 20 years ago. My conclusion: doing full-time intense work in a technical field until one is 70 would be easier than coal-mining, but no picnic either. Posted by: JimV | August 18, 2009 at 05:10 PM Bob the Builder: Someone making as much as you claim would not be so ignorant as to fail to realize that capital gains are no covered under FICA and that a person making 200k a year would have plenty of ability to take advantage of capital gains. Please do not try to drown out this conversation with mindless partisan fabrications. Andrew Biggs: You appear to be counting FICA taxation on income twice. Someone currently making the FICA cap of 109k or so would currently be paying a marginal rate of 37% or so as you say. But that wouldn't be added onto that 37%, the 37% rate is already reflecting FICA. http://delong.typepad.com/sdj/2009/08/social-security-time-to-uncap-fica.html
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paying a marginal rate of 37% or so as you say. But that wouldn't be added onto that 37%, the 37% rate is already reflecting FICA. Eliminating the FICA cap would simply keep the rate from dropping from that 37% rate after income passes the cap, as it does right now. Posted by: John Whitesell | August 18, 2009 at 06:54 PM Raising the cap is not a good idea. Social Security was designed to be an insurance program for workers paid for by workers, "so no damn politician can take it away from them." Raising the cap would turn Social Security into welfare. The issue is not what percent of total wages are taxes, but what is the appropriate cut off point beyond which people paying the most payroll tax could not reasonably expect a fair return for their money. Currently someone who pays at the cap most of their life can expect to get back everything he pays in, plus an effective interest equal to inflation plus the average rise in real wages. He would not get back as much as he "could have" made from other investments, but the difference is small enough that he can justify it to himself as a reasonable cost of insurance. On the other hand, the workers can pay for their own expected longer life in retirement... the reason for the projected shortfall... by raising the tax an average of 20 cents per week per year, while wages are going up an average of ten dollars per week per year. A good way to schedule this increase would result in an 80 cents per week increase in the tax in those years when the Trustees project that within ten years the Trust Fund will fall below one full year's reserves. Unfortunately everyone has an opinion about this without bothering to know the facts. Posted by: coberly | August 18, 2009 at 07:53 PM raising the retirement age would be cruel, stupid, and unnecessary people pay for their own retirement. they can pay to retire at the present retirement age with the present replacement rate with a tax increase that amounts to about 80 cents per week in some but not all of the years between now and 2085. a prediction that "we will be living longer" may or may not turn out to be true. but it is certain that not all of us will be living longer. the poor, the least healthy, and those with the worst jobs are likely to be the ones who die the youngest,not to mention blacks and hispanics as a group. so raising the retirement age would tend to insure that the people social security was designed to help would die before they got a chance to retire. the idea of retirement is not to give you an income after your job has squeezed everything it can out of you, it is to give you a chance to find a life after work... for whatever reason: a new job, write a book, go fishing, enjoy the grandkids. back in the bad old days only the relatively rich could look forward to retirement. social security gave the poor a chance to look forward to the same reward for a life of work... by making it possible for them to pay for it themselves. it is very unfortunate that learned men can run around touting an idea they haven't thought about for three seconds. Posted by: coberly | August 18, 2009 at 08:12 PM Dr Jay the Trust Fund is scheduled to be redeemed starting in about 2016. all the hysteria you are hearing about SocialSecurity going broke is a lie. With the Trust Fund being redeemed Social Security will need no change whatsoever until 2036 or later. But it would be better to raise the payroll tax about 80 cents per week starting in about 2026, and then again in some but not all years until 2085. This would enable all workers to retire on time at the current benefit schedule. Since their wages will be going up about ten dollars per week every year over this time, the tiny tax raise will be no hardship. It is amazing that we have made ourselves rich enough and healthy enough to all enjoy a long productive retirement, and instead we are going to let the Big Liars scare us into cutting our own heads off and selling ourselves into slavery until we are ready for the knackers. But you are not the only one here who is ignorant of the facts. Some famous names in economics are equally ready to spout off with a "fix" to a problem that doesn't exist... because, being very intelligent and learned folks, they never actually have to think about anything they say. http://delong.typepad.com/sdj/2009/08/social-security-time-to-uncap-fica.html
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Posted by: coberly | August 18, 2009 at 08:23 PM Mattyoung under the current Social Security law you can retire whenever you want. no serfdom here. at 62 you can begin receiving benefits adjusted to pay over your expected lifetime (at a lower rate per month) exactly what you would get over your expected lifetime if you retire at any later age (at a higher rate per month.) but it's an insurance plan, not a welfare plan, and not a magic money in the sky plan, so it has to be constructed with some eye to financial balance. the good news is that with a small tax increase... an average of 20 cents per week per year while your income is going up an average of ten dollars per week per year... you can retire at 62, if you want, and live a lot longer in retirement than i will, with enough money to support a modest standard of living. it is really a good deal. and if you actually understood it you would like it as much as i do. Posted by: coberly | August 18, 2009 at 08:31 PM What Michael Cain said. Lift the cap only to the original 90% of all income, and pre-publicize it that it's part of the original plan. This was Robert Ball's idea too. Posted by: Lee A. Arnold | August 18, 2009 at 11:03 PM John Howard Brown: "In a discussion with colleagues, I suggested raising the retirement age as one solution to the SS funding problems. A friend and colleague pointed out to me that college professors whose employment doesn't involve strenuous exertion may find this idea more agreeable than unskilled and semi-skilled workers. " In addition, a tenured economics professor ain't gonna be pushed out the door in their 50's, due to benefits cost, and the fact that somebody in their 20's can be worked for more hours. Basically, tenured economics professor occasionally think that the world still works like it did for white males in the top half of the economy during 1945-1973. Posted by: Barry | August 19, 2009 at 07:22 AM RE: "By holding the cap at the current level everyone who pays in, even at the cap, can reasonably expect to get ALL of his money back plus an effective interest equal to inflation ..." Question: does "getting back all money" include the company matching payment? I think it should, because really that is all part of my wages, from the company's point of view. Milage may vary, but I started paying FICA when I could put a dime in a vending machine and get out a 12-oz coke (in a glass bottle). Questimating an average inflation multiplier of only 4 (since my ontributions are higher now), it will take me about 20 years after age 66 to get it all back, and I don't expect to live that long, what with the chest pains and all. That's in the ballpark of what you say, though, and I'm not complaining. I'm just wondering whether we boomers are greedy bastards who didn't earn our SS pensions, or whether all those dimes built roads and dams, bought cokes for servicemen, and were a net positive contribution. Posted by: JimV | August 19, 2009 at 10:02 AM
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