Raise the Social Security Cap?Dec 27th, 2011 | By Staff | Category: Editorials
By Joe Boyles, Guest Columnist
When tackling Social Security’s nagging problem of under funding and future insolvency, there is a steady drumbeat to raise the limit of income subject to the tax, also known as the Social Security wage cap. Most of us don’t reach that cap with our monthly wages and salary, so we’re not aware of the limit. This year, the cap is $106,800. Next year, it rises to $110K. Any income (wages and salary) above that amount is not subject to the 12.4 percent FICA tax.
It sounds so easy to advocate raising or even eliminating the wage cap. Why not do it? Let me give you a couple of important reasons why we shouldn’t.
Let’s review a little history. That’s always a good place to start when considering any problem. Here are two important questions to ask before we “jump off the wage cap cliff.” First, how long have wages been subject to a Social Security wage cap and second, why was a cap originally put in place?
Ever since Social Security was enacted and signed into law in 1935, there has been a cap on income subject to the FICA (Federal Insurance Contribution Act) tax. In 1939, the limit was the first $3000 of income. Today, it is more than $100K, but inflation takes its toll.
Why did the originators of Social Security establish an income cap in the first place? For one thing, they correctly reasoned that high earners were planning for retirement on their own without government assistance. But even more importantly, they guaranteed that everyone enrolled in Social Security would receive all they put in to the program plus interest. Without the income cap, that guarantee would fall apart.
Don’t believe me? In 1936, a well-meaning New Dealer by the name of Ethyl Smith wrote a four-page pamphlet explaining Social Security to the average American worker. It was given to every working American enrolled in the system. In the pamphlet, Ethyl wrote this: “What you get from the government plan will always be more than you have paid in taxes and usually more than you can get for yourself by putting away the same amount of money each week in some other way.”
Ethyl wrote some other pretty amazing things in that pamphlet which incidentally, you can find on the Social security website. It is easy to critique and criticize her statements, but I’m certain that when she wrote these words 75 years ago, she meant everything and believed it to be true. Ethyl was looking into a crystal ball and predicting the future. Today, we have the advantage of three-quarters of a century of experience – the crystal ball is much clearer.
But this much is clear – if there had been no cap on earnings subject to the payroll tax, Ethyl Smith could not have written those words in her pamphlet. Likely, there would have been no Social Security either. The income cap was a fundamental element of the original FICA.
If you’re an ardent student of what I’ve written about Social Security over the past six years, you know that I’m an advocate for reform to update the Depression era program to something that will work in the 21st Century. So this is what I would say to those who want to eliminate the income cap – fine, but my price is total reform of the system. To use the existing system and eliminate the payroll cap would be akin to removing the cornerstone from the foundation of a building – it undermines the foundation.
The income cap was a fundamental assumption that the FICA was based upon 76 years ago. I will fight its elimination tooth and nail.