Forbes post, “How To ‘Scrap The Cap’ The Right Way”

Originally published at Forbes.com on February 13, 2019.

It is, so Twitter tells me, “Scrap the Cap Day” — the day when Social Security expansion activists are out in force promoting the idea that, because someone earning a million dollars in wage income would hit the Social Security ceiling today, it’s a clear proof that we need to eliminate the ceiling itself.  The Center for American Progress chose today to issue a report on the topic and Senator Bernie Sanders chose today to unveil his Social Security legislation, which, as described by CNN, boosts benefits by means of an additional 12.4% payroll tax on earned income above $250,000 as well as a 6.2% tax on investment income for singles with total income above $200,000, or $250,000 for couples, in the same fashion as the existing Medicare surtax.

(This legislation is further described as a reintroduction of his 2017 bill, which sets a minimum benefit after 30 years of eligible employment at 125% of the single-person poverty measure, or $31,225 for a two-person household, indexed at national wage increases; indexes Social Security by the CPI – E, a form of CPI specifically reflecting the spending of the elderly; but does not make any provision for the indexing of the thresholds for the payroll or Medicare surtax.)

Now, this isn’t new, and I’ve addressed the issue in an article last year, but at the risk of repeating myself, sure, we can “Scrap the Cap.”  But if we do, we need to be honest about it.

First, we need to acknowledge that Social Security would no longer be a Social Insurance program as conventionally understood.  Readers of that prior article will recall that we are already outside the norm in terms of the way countries fund their pension systems, at least with respect to systems which resemble ours in terms of providing accruals based on pay and work history.  Their ceilings are much lower — to take one example, in Canada, the ceiling is CAD 57,400 (about USD 43,000).

Now, it does appear that the conventional wisdom that people won’t accept Social Security as a “welfare program” may no longer be true — after all, there is considerable interest in the federal government providing all manner of services for residents, from medical care to free child care and tuitionless-universities.  But without getting bogged down in that debate, we need to at least acknowledge what’s on the table.

Second, if we’re to abandon the Social Security ceiling, then there’s really no reason to tie Social Security taxes to specifically earned income or a payroll tax.  In that event, it’s far more practical to simply increase income tax rates the requisite amount and collect the tax revenues along with all other taxes.  (Again, I raised the issue with respect to Medicare earlier as well.)

And, finally, once we abandon the connection between earnings and Social Security that’s inherent in the elimination of the Social Security ceiling and the taxation of investment income, and once we demand that the upper middle class and wealthy “pay their fair share” — that is, pay more in than they get out in benefits — then the entire formula is due for a re-think, as, again, the most honest way to deliver benefits in such a system is with a flat dollar amount, whether that’s means-tested and phased-out with income (Australia), part of a two-element system alongside a wage-based system (Canada), or a simple flat benefit for everyone (the Netherlands).  And the size of such a benefit will have to be determined, not in isolation, but by evaluating the system’s cost and retiree living standards alongside the needs of families with children, the disabled, and the poor.

December 2024 Author’s note: the terms of my affiliation with Forbes enable me to republish materials on other sites, so I am updating my personal website by duplicating a selected portion of my Forbes writing here.