Congressman Robert Wexler has announced his intention to introduce legislation which is intended to resolve Social Security's funding shortfall by raising taxes on upper income workers.  This is a welcome break from the reluctance of Congressional Democrats to put proposals forward to deal with the financial challenges facing Social Security.  The proposal raises several issues that deserve debate, but Congressman Wexler has made an important contribution the debate by putting this proposal on the table for discussion.

The proposal outlined by Congressman Wexler would establish a 6 percent tax on all income above the current $90,000 cap. Three percent would be paid by workers and 3 percent paid by their employer.  The bill would also reinstitute "pay-go" rules for federal budgeting, requiring that any tax cuts or increase in entitlement spending be paid for either by raising taxes or cutting spending elsewhere.  According to Congressman Wexler’s office, the revenues raised by this proposal would be sufficient to eliminate the Social Security shortfall estimated by the Congressional Budget Office.

Putting Social Security on a sound financial footing will require policymakers to make tough decisions about the amount of resources that should be devoted to Social Security and allocating those limited resources. By proposing increased taxes to pay promised benefits, Congressman Wexler acknowledged that tough choices will be necessary to eliminate the deficit facing Social Security whether or not individual accounts are included in a reform plan.  In essence, the Wexler proposal shows the extent to which taxes would have to be raised to preserve current benefit promises, at least as estimated by the Congressional Budget Office.

Because the proposal does not pre-fund Social Security's future spending, it has no transition costs, but it would not put Social Security on a sustainable fiscal path.  In essence the plan would bring in additional revenues to build up the trust fund beyond what is projected under current law in order to offset cash deficits that would begin a few years later than what is projected under current law and continue to grow.  Eliminating the payroll tax cap would improve the near-term unified budget outlook, but it would also increase the Social Security’s claim on general revenues in the future.

Relying on a greater trust fund buildup to cover cash deficits that will continue into the future raises the question of whether these surpluses will be saved to pre-fund future benefits. Past efforts to pre-fund Social Security's future liabilities via trust funds have failed to work in an economic sense, because Congress tends to spend the money in trust funds or "off-budget" accounts anyway.  That is why many Social Security reform advocates are interested in individual accounts as a more effective method to save current payroll taxes to pre-fund a portion of future benefits than trust funds.  In a sense individual accounts are the ultimate lock-box, ensuring that current payroll taxes are truly saved for future retirement benefits and taking them entirely off the federal ledger.

Congressman Wexler’s proposal would partially address this concern by reinstating pay-as-you-go rules to restrict the ability of Congress to enact increased spending or reduce revenues based on the larger Social Security surplus.  However, increasing the size of the Social Security surplus available to mask the deficits in the rest of the budget could diminish the pressure for deficit reduction. 

Many of those who have criticized the progressive price indexing proposal developed by Bob Pozen and endorsed by President Bush argue that it would undermine political support for the program. In his speech outlining his proposal, Congressman Wexler stated that “By means testing Social Security, President Bush effectively ensures the gradual loss of support among higher and middle-income Americans and begins the process of dismantling the Social Security System by turning it into a welfare program.”  However, the Wexler proposal raises that same concern to a much greater extent.

The rate of return earned by upper income workers – and by extension their view of the deal Social Security offers to them -- would be reduced by a similar amount whether they had to pay more into the system now as a result of the wage base being increased or eliminated or receive fewer benefits from the system when they retire as a result of progressive indexing.  The issue of which approach would do more to undermine the political support for the program depends on whether upper income workers are more sensitive to their tax burden today or their expected benefits in the future.

The Wexler proposal creates a much greater risk by imposing a tax surcharge on earnings above the cap without crediting workers with additional benefits for their increased contributions.  This would represent a radical departure from the historical construction of Social Security.   For the first time, individuals would be taxed solely to provide benefits to others, without any connection between the individual’s contributions would and his or her own. 

Denying workers credit for increased wages subjected to taxation in benefit calculations would go much further toward changing the nature of the Social Security system from a social insurance program to a welfare program than would be the case under progressive indexing, which would preserve the link between contributions and benefits, albeit at a lower replacement rate than current law for earnings at the top of the income scale.   If reducing the benefits that upper income workers will receive in the future will create political risks for the Social Security system, then increasing the taxes that these workers pay today without providing any increase in benefits for their increased contributions will create even greater risks

The decision to set the goal of eliminating the deficit as projected by CBO instead of relying on estimates by the Social Security Administration Office of the Actuary (OCACT) is also somewhat troubling.  Until recently there was a consensus across the political spectrum that the SSA actuaries should be the arbiter of the impact Social Security reform plans would have on trust fund solvency.  This approach made sense because OCACT has statutory responsibility for providing the estimates of the financial condition of the trust fund for the Social Security Trustees.  Public confidence in the ability of Congress and the administration to manage the Social Security program would be damaged if Congress enacts legislation described as making the trust fund solvent based on CBO assumptions only to have the Social Security Trustees report a few months later that the trust fund is still insolvent.  In addition, the Congressional Budget Act requires Congress to rely on estimates provided by the Social Security Trustees in enforcing points of order regarding the impact of legislation on the financial condition of the trust fund.

Reaching agreement on a solution will require sacrifices by both parties.   All options for reform should be on the table.  Although there are legitimate differences about the merits of the proposal put forward by Congressman Wexler, it should be part of the discussion to find a balanced solution to the financial challenges facing Social Security.

Links:

Congressional Budget Office Updated Long-Term Projections for Social Security (March 2005)

Centrists.Org  Raising the Cap on Payroll Taxes Doesn't Solve the Social Security Problem (November 17, 2003)

Congressman Wexler's Press Release

Centrists.Org  Progressive Approaches to Benefit Changes In Social Security Reform (Revised April 29, 2005, Originally Published January 26, 2005)

Centrists.Org  President Bush Calls for Making Tough Choices In a Progressive Manner to Restore Social Security Solvency  (April 29, 2005)