Another Social Security Red Herring?

What do you buy someone for Social Security Payroll Tax Freedom Day? Nothing they can't buy for themselves! That's because the 'holiday' is the day the top one percent of Americans finish paying their annual Social Security payroll taxes.
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What do you buy someone for Social Security Payroll Tax Freedom Day? Nothing they can't buy for themselves! That's because the 'holiday' is the day the top one percent of Americans finish paying their annual Social Security payroll taxes. (It was February 11 this year, in case you want to send a belated card.)

The reason you probably missed this holiday is because 94 percent of us make less than $118,500 in wages, so most people don't realize it is only the first $118,500 subject to the Social Security payroll tax. The reason the tax cap is this low is wage stagnation; if wages had kept pace with the projections made in 1983, the cap would be about 27 percent higher than it is. (Experts made those predictions because in the five years leading up to 1983, the average annual wage increase was 8.3 percent. In the five years leading up to 2014? A mere 1.7 percent.) As a result, the tax today applies to only 83 percent of wages, down from 90 percent in 1983 -- excluding the employees who have seen the greatest growth in wages.

It's important to keep these facts in mind as we follow the latest act in Social Security political theater -- this time over the Disability Insurance Trust Fund (DI). The Social Security payroll taxes are split between the Old-Age and Survivors Insurance and the disability fund, with the funds working in tandem, they are depicted as separate for accounting purposes. Only Congress has the ability to allocate the payroll taxes collected between the two funds; the DI needs more of an allocation in order to pay out full disability benefits starting in late 2016.

Congress has reallocated payroll tax revenues many times in the past -- and in both directions. This is a traditional and historically noncontroversial step that has been taken eleven times since 1968. The last time lawmakers changed the allocation formula was in 1994; they knew at the time that this reallocation would take care of funding until late 2016.

Yet on the first day the 114th Congress convened, the House of Representatives adopted a rule essentially preventing this routine reallocation. Having created the crisis, they're now sounding the alarm.

But failing to find a solution will have very real consequences for the eleven million people receiving disability benefits -- a 20 percent cut to the average monthly benefit of $1,165.39. Asked about the potential impact of cuts at a recent Hill hearing, acting Social Security Commissioner Carolyn Colvin said "I don't want to be dramatic, but I've worked with this population my whole career. I think we [would] give them a death sentence."

If the House had not adopted the new rule, the cuts could be prevented by temporarily adjusting the payroll tax to send more to the disability program; lawmakers could shift 0.5 percent of payroll taxes, starting this year with declining percentages to 2024 and provide full benefits until 2033.

A good question to ask of our representatives is this: if they are so concerned about the Trust Funds, why not look seriously at raising the cap? It is one of the most universally popular options for ensuring a strong Social Security Trust Fund; the National Academy of Social Insurance (NASI)'s surveys consistently find strong support across party lines for raising the cap. An October survey found 83 percent of respondents -- including 71 percent of Republicans, 92 percent of Democrats and 84 percent of Independents -- in support of such a move.

Despite this, lawmakers continue to suggest that what really needs to happen are cuts in benefits and a raise in the retirement age. In late January, Reps. Tom Cole (R-OK) and John Delaney (D-MD) said they planned to introduce a bill this Congress that would create a Social Security commission to propose changes to the program.

"The commission would probably gradually raise the retirement age, it would probably look at chained CPI, would probably look at means-testing and probably look at some sort of revenue, or reduce benefits for upper-income people," Cole was quoted as saying.

Women need to pay particular attention to these debates. They are more likely to rely on Social Security because they have fewer alternate sources of income such as pensions or retirement savings, they often outlive their husbands and they're more likely to be left to raise their children if their husbands die or become disabled. They represent 57 percent of all Social Security beneficiaries age 62 and older and approximately 68 percent of all beneficiaries age 85 and older. And because their benefits on average are significantly lower than men's, the smallest cuts can have tremendous consequences.

We cannot overstate the importance of these programs for the millions of Americans who rely upon them for their basic needs. So as the debate over 'how to save' Social Security heats back up, let's keep reminding our policymakers that we should focus on strengthening the program, not cutting hard-earned benefits. Very few programs have the record of success that Social Security can claim, and the steps we can take to keep it that way are both popular and practical.

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