Uncapping payroll tax won’t fix Social Security 

Social Security is like a weak artery that could burst open at any moment. A Band-Aid might keep it from bursting for a little while, but the basic problem remains and sooner or later the stricken artery fails, with terrible consequences. Even so, there are those in the nation’s capital who seek a Band-Aid to fix Social Security and prevent it from suffering a terminal rupture.

The Band-Aid is raising or removing the cap on Social Security payroll taxes, which is 12.4 percent of earnings up to $90,000 per year, with the employee paying half and the employer paying half. Self-employed people pay the entire 12.4 percent themselves.

There has been talk in recent days of an impending deal between the Bush administration and Congress to "fix" Social Security by, among other measures, modifying or perhaps even eliminating the payroll tax cap. Among the most enthusiastic advocates of removing the cap entirely is the Economic Policy Institute, which contends that removing the earnings cap and increasing the payroll tax to 13.5 percent would permanently solve Social Security’s funding crisis.

Here’s the problem with such scenarios: Eliminating the cap only delays the crisis about six years, according to the Social Security Administration’s actuary. Instead of rupturing in 2017 as now projected, Social Security would rupture in 2024. The interim costs would be extremely painful, especially for the estimated 10 million Americans whose annual take-home pay would be reduced on average nearly $5,000 and the legions of small-business owners and self-employed people whose taxes and operating costs would spike. A recent Heritage Foundation econometric study projected 1.1 million lost jobs during the decade after the cap is removed.

Worse, when it becomes clear the Band-Aid has failed, Washington politicians will propose capping benefits but not taxes. Millions of Americans will then pay Social Security taxes on all their earnings but not get the full benefits. In other words, Social Security will become a welfare program. Is that the legacy President Bush wants?

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Staff Report

Staff Report

A daily newspaper covering San Francisco, San Mateo County and serving Alameda, Marin and Santa Clara counties.
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