I almost agree with the editors of the Washington Post. In a recent editorial they say this in response to a proposal that FICA max be increased:
Even after all that pain, removing the cap would only close about half of Social Security’s funding shortfall. That’s because the fundamental problem with the program is not that it doesn’t tax enough. The problem is that its structure is based on demographic assumptions that no longer hold.
That’s almost correct. If they restated it “The problem is that its structure is based on demographic and income assumptions that no longer hold” I would agree completely. Notice the emphasis. Social Security was designed around two assumptions: the ratio of workers to retirees and the distribution of wages. The first has changed because Americans live longer and have fewer children. The second has changed because an increasing share of national income now goes to people earning above the FICA wage base.
The change is easy to see. Since 1980, incomes for the top 1 percent have grown at a dramatically faster rate than those of everyone else.
Note that the graph has two scales, one for incomes of the top 1% of income earners and the other for the bottom 99%. If the bottom 99% were shown on the same scale as the top 1%, the line for them would read as flat whereas it actually increased. Since earnings above the FICA wage base are exempt from the payroll tax, shifting more national income into those earnings automatically reduces the share of total wages subject to Social Security taxation.
I’m open to other suggestions for reforming Social Security than increasing FICA max. I know of several:
- Just abolish it.
- Supplement it with private accounts. Let individuals buy stocks or other investments. This was proposed during the Bush II Administration.
- Supplement it with national accounts. Let the Social Security Administration buys stocks or other investments.
but let’s not pretend that each of those wouldn’t have adverse side effects as well. If you’d prefer one of those alternatives, explain how you’d mitigate the problems it would create.
#1 and #2 assume that we’d be satisfied if some retirees became destitute in their old age. Nearly 40% of Americans rely solely on Social Security Retirement Income. The problem with #2 is that it shifts investment risk to individuals. Some retirees would inevitably reach retirement with inadequate savings.
The problem with #3 is that over time the federal government would come to own an increasing percentage of the U. S. economy. My experience has been that most proposing #3 are strongly opposed to that.
