Social Security – don’t end the cap on taxable wages.

Recently, more people have called for an end to the cap on wages that are subject to the social security tax.  (For 2015, only the first $118,500 of wages are taxable, no social security tax is paid on wages above that amount.)  I think that would be the wrong way to go.  Social Security was sold to the public as a retirement plan where the amount of benefit received had some relationship to the amount paid in. It was not sold as a welfare program where the rich subsidize the poor. The benefits paid under Social Security are limited.  That is why taxable wages are limited.  Social Security is was intended to cover only a portion of a person’s needs during later years.  People should expect to continue to work throughout their lifetimes unless they save enough for their own retirement.  Unless, of course, we want to change over to a welfare system, where benefits are determined by politics rather than the amount you pay in.

Social Security funding solutions

If we do nothing to fix our Social Security scheme, our trust fund will be depleted by 2033, and then benefits will be required to be reduced by 23%!  There are only two ways to fix this problem: raise taxes or reduce benefits.  Taxes can be raised on all workers, on only certain workers, or on non-workers.  Benefits can be reduced by lowering monthly payment amounts or by raising the retirement age.  Of course, any combination of the above is possible.

Recently, more and more people have been calling for the elimination of the cap on Social Security taxable earnings.  (For 2014, earnings over $117,000 are not taxed for Social Security.  The cap is increased every year.)  The original idea for the cap was that Social Security is an insurance-type plan and taxes paid in should bear some relationship to benefits paid out.  The tax is limited because the benefits are limited.  Social Security was never intended to be, or sold to the public as, a welfare plan.  (We have a broad welfare safety net for those who are poor.)

Like so many government programs, Social Security provided benefits greater than the amount of tax collected.  Current and past retirees got their benefits and shifted much of the cost to future generations.  This needs to stop.  Wherever possible, those who receive benefits should pay the cost.  It would be morally wrong to place extra taxes on high earners just because we can.  That would be an example of tyranny by the majority.

To the extent that we do not want to reduce benefits, it seems most fair to raise taxes on all earners.  But maybe the best solution would be to continue to raise the normal retirement age.  Today we live much longer and healthier lives than when Social Security was created.  Should a required government retirement insurance plan be designed to pay for 20 or 30 or more years of retirement?  For those unable to work, we do have Social Security Disability benefits.  For those who are healthy, it seems better to delay retirement and not reduce the benefit amount.

Disclosure:  I am currently semi-retired and my earnings are below the cap.  So, increasing or eliminating the cap would not increase my SS taxes.  An overall increase in the SS tax rate would increase my SS taxes.  Most proposals to increase the normal retirement age would not affect me since I am 61 years old.