Attacking Social Security

House Speaker Boehner reportedly wants to raise the retirement age to 70 for people who will not retire for 20 years. Is this a good or bad idea? First let's check with someone who is very familiar with Social Security.

Last month Robert Reich, a former trustee of the Social Security trust fund, explained why raising the retirement age is not the answer keeping the trust fund solvent.

Remember, the Social Security payroll tax applies only to earnings up to a certain ceiling. (That ceiling is now $106,800.) The ceiling rises every year according to a formula roughly matching inflation.

Back in 1983, the ceiling was set so the Social Security payroll tax would hit 90 percent of all wages covered by Social Security. That 90 percent figure was built into the Greenspan Commission’s fixes. The Commission assumed that, as the ceiling rose with inflation, the Social Security payroll tax would continue to hit 90 percent of total income.

Today, though, the Social Security payroll tax hits only about 84 percent of total income.

It went from 90 percent to 84 percent because a larger and larger portion of total income has gone to the top. In 1983, the richest 1 percent of Americans got 11.6 percent of total income. Today the top 1 percent takes in more than 20 percent.

If we want to go back to 90 percent, the ceiling on income subject to the Social Security tax would need to be raised to $180,000.

It's a matter of increasing the amount of wages the Social Security payroll tax applies to. Since income for the wealthiest has increased at a faster rate than inflation, that means the wealthiest among us would have to pay more. Let's look at some numbers.

Using the current tax rates here are the differences for the two wage limit rates mentioned above.

Employee/Employer at $106,800	Employee/Employer at $180,000
Social Security Tax		Increase of
$6,621.60	$11,160.00	$4,538.40
Self-Employed at $106,800	Self-Employed at $180,000
Social Security Tax		Increase of
$13,243.20	$22,320.00	$9,076.80

The employer and employee would be on the hook for an additional $4,538.40 each for the $73,200 difference in wages. The self-employed would have to pay an additional $9,076.80. Note that wages above the $180,000 limit would be exempt.

According to the latest numbers (PDF) at Bureau of Labor Statistics, there are a roughly 9.5 million self-employed workers and about 129 million wage and salary workers in the U.S. as of the fourth quarter of 2010.

Speaker Boehner's proposal would affect those who need Social Security the most, i.e., not the wealthy Americans, by making them pay more into the trust fund before they can collect Social Security. Yes, the wealthy would pay more as they wait until age 70 to retire, but they won't need Social Security to survive.

If you are currently 50 years old, the SSA expects you to live (PDF) for 28 more years if you're a male and 32 more years if you're a female. So men, on average, would retire at 70 and collect Social Security for roughly eight years. Women, on the other hand, would collect Social Security for 12 years on average.

The trust fund does not contribute to the federal deficit. Social Security may be one of the largest single expenditures in our federal budget, but it is a sustainable expenditure--sustained by the FICA taxes placed on our wages. Raising the ceiling so that 90% of all wages are covered would ensure the viability of the program well into the future.