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To Fix Social Security, Some Democrats Want To Lift Wage Cap

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For the past three years, there's been a shortfall in the payroll taxes collected for Social Security. And as more baby boomers join the ranks of the 57 million people already receiving benefits, that deficit is bound to keep growing.

At the same time, the overall share of wages being taxed for Social Security is shrinking as the higher wages that are exempt have soared. The Social Security Board of Trustees predicts a nearly $3 trillion trust fund built up over decades will vanish within 20 years.

But that does not seem to faze Sen. Elizabeth Warren. The Massachusetts Democrat has gotten a lot of attention for a speech defending Social Security that she delivered last month on the Senate floor.

"With some modest adjustments, we can keep the system solvent for many more years, and we could even increase benefits," Warren says.

To finance that, Warren and some of her Democratic allies want to lift the cap on wages taxed for Social Security.

Iowa Democratic Sen. Tom Harkin sponsored legislation that would gradually remove the cap that currently makes only the first $113,700 in wages subject to Social Security taxes. He says it's the only fair thing to do.

"If I make $50,000 a year, I pay Social Security taxes on every dime I make. If I make $500,000 a year, I only pay taxes on about the first 20 cents. After that, I don't pay any more Social Security taxes. That's regressive," Harkin says. "You want to make it more progressive, raise the cap so everybody pays their share on every dollar they make."

And as President Obama noted this week, an ever greater share of dollars is being earned precisely by those at the top.

"Since 1979, our economy has more than doubled in size, but most of that growth has flowed to a fortunate few," Obama says. "The top 10 percent no longer takes in one-third of our income; it now takes half."

That concentration of wealth has taken place beyond the earnings subject to Social Security taxes. Melissa Favreault, a Social Security expert at the nonpartisan Urban Institute, says that has meant an ever greater share of the national income is contributing nothing to Social Security.

"We do have this declining share of overall earnings that are taxed, reflecting the fact that the top half of 1 percent or so has been garnering a really large proportion of total earnings," Favreault says.

Favreault says three decades ago, 90 percent of the nation's wage earnings were taxed for Social Security; that proportion has now shrunk to 83 percent. And that's made an already regressive tax even more so.

Favreault says raising the rates for Social Security withholding would be one way to shore up the program's finances, but that would only make the tax even more regressive. Removing the cap on income subject to the tax, she says, would make it more progressive.

"The cap, I think, is really a natural place to look, just because there has been this explosion in earnings inequality, and there's been stagnation for earners at the bottom and in the middle of the wage distribution. So it's definitely a good place to look," she says.

Removing that cap could keep Social Security solvent 30 years beyond what's currently projected. But Andrew Biggs of the American Enterprise Institute, a conservative Washington think tank, warns that doing so would undo the original intent of Social Security, which was to be an insurance program for everyone.

"If Social Security comes to be seen as a welfare program, a highly redistributive program, it takes a 'soak the rich' kind of approach," Biggs says. "Then political support among, certainly among conservatives, among Republicans, among higher-income people is going to drop. And you need everybody onboard in order to keep a system like this going."

Biggs says making all payroll income subject to the 12.4 percent Social Security tax would be a sharp tax hike for the wealthy. That's a tough sell on Capitol Hill, especially for Republicans. Pennsylvania Sen. Pat Toomey, who serves on the tax-writing Finance Committee, says, "I'm not interested in tax increases."

So at least for now, the wealthiest 6 percent of taxpayers will continue to be protected by the Social Security wage cap.

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