I’m going to write about math & money, again. (I’m already wincing.)
I’ve been reading several articles on the pros/cons of adjusting the payroll tax cap (also known as FICA). As of right now, the employer must withhold 6.2% of an employee’s wages and pay a matching amount in social security taxes until the employee reaches $102,000 for the year (in 2008). The total is 12.4% for the employee and the employer. Once that amount is earned for a given year, neither the employee nor the employer owe any additional social security tax for that year. Just under 6% of U.S. wage earners make more than $102,000 in wages, so many economists believe that raising the cap on the payroll tax to $200,000 would generate more income for the Social Security program and would not impact low-wage-earners in America.
Here’s a pro argument for adjusting the cap upwards:
Let’s remind ourselves that Social Security, which cut poverty rates among the elderly from 35% in 1960 to 9.4% in 2006, is no Robin Hood plan that robs the rich to pay for the retirement of the working class. Rather, it is a mildly redistributive public retirement program financed by contributions from the wages of working people. In fact, Social Security taxes fall far more heavily on the poor and working class than on the well-to-do. Payroll taxes are a fixed 12.4% (actually 6.2% on employees and 6.2% on employers); they are levied only on wage income, not on property income; and the cap on wages subject to the tax (the subject of the debate between Clinton and Obama) means that while most workers pay the tax on every dollar of their income, the highest earners pay it only on a part.
The con arguments against raising the payroll tax cap are even more political and partisan (if you can believe it) than the argument above. Those arguments can be found on the CATO Institute website, which is very thorough and goes into great detail about why Social Security is a failed American benefit. Basically, there’s a real push to privatize social security because the government shouldn’t be in the business of investing your retirement money or redistributing income & wealth.
So what do you think?
- Is there really a social security crisis?
- Should we raise payroll taxes to pay for it
- Should we privatize social security?
Furthermore, does it benefit Human Resources professionals to get into these political discussions? What do we need to know about this issue? What do you know about this issue that other people don’t know?
Educate me, please.
{ 4 comments… read them below or add one }
An excellent summary of Social Secuity and the issues about increasing the maximum, in plain English.
Thanks, Ed. I just wish someone could tell me the *right* answer to this problem.
I’m not really sure if there is actually a crisis going on or not. I think there is, ’cause that is what the news says…
However, I don’t agree with a couple of the “con” arguments for raising the cap ala Michael Tanner @ CATO:
- “But while soaking the rich may be a politically popular approach, the reality is that this enormous tax hike would seriously damage the U.S. economy while doing very little to save Social Security.”
I’m sorry – what? SOAKING the rich? How so? The rest of us (that make under 97.5k/year) seem to handle paying our 6.2% on ALL of our earnings just fine, yo! Income tax is capped for you, so calm down.
-”As bad as that would be in the aggregate, it would be even worse for individual workers. A worker earning $103,000 per year would pay $1,240 more in taxes each year.”
OH NO! That will most certainly break the bank of someone earning OVER 100 G’s A YEAR. Christ.
He does have some very good points though:
-”Small businesses would be particularly hammered: about one-third of the workers affected by raising the cap would be small business owners.”
and
-”Even the most drastic, and politically unlikely proposal — completely eliminating the cap without allowing any additional credit toward benefits — would result in only eight additional years of cash-flow solvency.”
I like the idea of having more control over where and how my money is invested. At the same time, I can totally see the transition period being a complete nightmare and how are we going to pay for it? Yikes.
Wenchie, I agree with you on the concept of a crisis. The only crisis this county faces is when I run out of Tuna Flakes. It’s a national nightmare for Scrubby.
This comment totally intrigues me: