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Social Security: Nixing the wage cap
How effective would such a measure really be? Depends how you interpret the facts.
February 28, 2005: 9:18 AM EST
By Jeanne Sahadi, CNN/Money senior writer
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NEW YORK (CNN/Money) There's been a lot of talk lately about eliminating the cap on wages subject to the Social Security payroll tax.

Currently, the first $90,000 of wages is subject to that tax, which is used to pay Social Security benefits to current retirees.

President Bush is adamant that he doesn't want to increase the payroll tax rate (12.4 percent of wages, half paid by workers, half by employers). But he hasn't specifically ruled out lifting the wage cap.

Such a move would go a long way to helping the system achieve solvency, supporters say.

No, it wouldn't, critics contend. (They further argue that eliminating the wage cap amounts to a tax increase on high earners and their employers. A worker earning $150,000, for example, would pay an additional $3,720 a year, as would his company.)

In deciding how effective wage-cap elimination would be, it depends on which facts you consider, and how you interpret them.

House majority leader Tom DeLay (R-Texas) was quoted in The New York Times as saying, "If you completely remove the cap, it buys you six years; that's not good."

DeLay was referring to a finding from a new report released earlier this month by two Social Security actuaries.

The report found that if the wage cap is eliminated, the system wouldn't have to start tapping the government bonds that make up its trust fund until 2024. That's six years after 2018, the year the trust fund would need to be tapped if nothing changes, according to the Social Security trustees.

But here's another finding from the same actuarial report: If the wage cap is eliminated, the system's trust fund won't be exhausted until 2079.

In other words, the system would be able to pay full benefits for 74 more years. That's an additional 37 years beyond 2042, the year the latest Social Security Trustees Report pinpoints for trust fund exhaustion if nothing changes.

So does wage-cap elimination go a long way to achieving solvency or not?

Those who would say it does not argue that 2024 is the date to worry about, because the government has to start paying back the money it owes the system, since it spent the surplus of Social Security taxes paid in over the past 20 years. (The surplus was lent to the Treasury in exchange for special-issue Treasury bonds.)

Paying back those bonds means the government, already carrying a large deficit, would either need to issue more debt on which it will have to pay interest, raise taxes or cut spending.

Others would say eliminating the cap makes the system solvent for another 74 years. And the pressure to pay back the surplus isn't Social Security's problem, it's the Treasury's problem.

"The fix doesn't necessarily have to be on the Social Security side but may be on the tax or budget side," said Ron Gebhardtsbauer, senior pension fellow at the nonpartisan American Academy of Actuaries.

But, he added, the problem of coming up with more money doesn't go away. Nor do the demographic challenges facing the system long-term.

Much has been made of the pressure caused by Baby Boomers' retiring. But they are not, Gebhardtsbauer said, "the pig in the python."

Yes, Boomers' retirement means the ratio of workers to retirees will decline, and consequently the system will need to tap its trust fund to pay full benefits since it won't be taking in enough payroll tax revenue from workers to cover the bill. (That shortfall is what the surplus was intended to cover.)

But even after the Boomers die off, the amount workers pay into the system will remain fairly static while the life expectancy of retirees will continue to grow, Gebhardtsbauer said.

That's why the American Academy of Actuaries would like to see a solution that not only makes the system solvent for the next 75 years, but one that makes that solvency sustainable for good.

If the wage cap is eliminated, Gebhardtsbauer said, you'd need to do something else for permanent solvency. One option, he suggested, is to slowly raise the retirement age in step with increases in life expectancy.

The increases wouldn't need to take effect until 2030 and they could be phased in very gradually thereafter.

By 2029, the full retirement age will be 67. If you start increasing the retirement age in 2030 by 1 month every two years, it will take 24 years to raise the retirement age to 68, Gebhardtsbauer said. "That would be your permanent fix."  Top of page

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