Sunday, January 16, 2005

Social Security payroll tax cap

I wouldn't be surprised if Bartlett were getting his information from these people, the National Center for Policy Analysis. I have some problems with their numbers, though. Number one, they use 2018 as the insolvency date for Social Security, totally disregarding the Trust Fund. Many of us have speculated that privatization proponents' argument that the bonds in the Trust Fund were just IOUs from one part of the federal government to another, thus they are meaningless. They argue that there is no Trust Fund and that Social Security is insolvent after 2018 when we officially reach deficit territory. They argue this even though they know that the Treasury bonds in the Trust Fund will have to be paid (it's in the Constitution) from the General Fund, i.e. income taxes. Payroll taxes are regressive, charging people for working hard and they payroll tax was raised in 1983 to build up money in the Trust Fund. After 2018, the interest from the bonds in the Trust Fund to cover the deficit in payouts versus contributions will be paid from income taxes, a progressive tax on income. The more money you have, say in bonds and stocks, the more you have to give the government. Rich people hate that part of the deal. Privatization and huge benfit cuts mean they don't have to pay back the money in on the bonds to cover the long-term cost of the current system. They do a really funny math trick, by arguing that the Trust Fund doesn't exist, they claim that the 75-year shortfall in the system is $27 billion dollars. They correctly surmise that eliminating the tax cap altogether would increase Social Security revenue by $14 trillion over that time. But since we know the Trust Fund is there and the bonds will be paid, we can go with either the actuaries' projection of $2 trillion or the CBO projection of $3.7 trillion over 75 years. I've been using the CBO projections for most of my writing, so we'll go with that. As you can see, eliminating the payroll tax cap altogether would more than make up the Trust Fund bankruptcy in 2053. Of course, the entire system will still be solvent, just paying out less in benefits if we do nothing. Of course, no one is advocating eliminating the cap. The most reasonable assessment I've seen is that we phase in an increase in the cap to $147,000 over a ten-year period. That would cover about 90% of wages, which is what the current cap was intended to do. That cuts that $3.7 trillion by about 40%. If we have economic growth greater than 1.9% over that 75 years, the shortfall disappears. This is all to show that they people proposing privatization and drastic reform just can't add 2+2. Even basic high school math shows that the system now in place is running just fine. Some minor tweaks and we have no problems.

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