What is “Scrap the Cap,” and why do we need it?

The Social Security payroll tax is unfair. If we fix it, there's a bonus: Full benefits for today's young people when they retire.

Contributor: Buddy Robinson

The Social Security payroll tax lets people with huge wages (and the companies that employ them) off the hook. That should be changed, so that rich wage earners pay the same percent that the rest of us do. Solving that problem will also solve a second problem: It will ensure that when today's young people retire, they will get full benefits instead of just three-fourths.

Social Security benefits are funded by money from the payroll tax, which is 6.2 per cent of your wages. (There's another 1.45 per cent deducted also, which helps pay for your Medicare when you reach 65 or are disabled.)

Many people don't realize that their employer, meanwhile, has to kick in an equal amount to match your payroll deductions. This is, in fact, the only nationally required method to make your employer pitch in something for your retirement.

Even more people don't know that Social Security has a dirty little secret: The payroll tax is only assessed on the first $137,700 per year in wages. All wages above that, no matter how high they go, are exempt from the payroll tax. They're exempt from both the payroll deductions as well as the matching contribution from the employer.

So, if you earn $137,700 a year or less, all of your wages are subject to the tax. Any amount above that is not, however, and this effectively reduces the percent of your wages which are withheld. That $137,700 annual amount is called the “cap” on taxable wages.

If you make a million dollars a year in wages (think many corporate CEOs), then you are in effect paying not 6.2 per cent, but instead the tiny amount of less than one percent of wages in your Social Security payroll tax. This graph shows the story: (Note: it says $132,900 for the cap because the graph is two years old.)
It is not fair that very high wage earners get such a break. After all, they're the ones who least need extra help. The same goes for the big, wealthy corporations that can afford to pay those kinds of salaries.

The way to fix this unfairness is simple: Just remove that $137,700 upper limit on taxable wages. In other words, “scrap the cap.”

Besides fixing the unfairness of the payroll tax, scrapping the cap has a huge benefit: The additional payroll taxes from very high wage earners will provide enough money to fully fund Social Security, for many years, at least 75 years into the future.

If the cap stays in place, there will only be enough money coming to pay three-quarters of full benefits 75 years from now. If the cap is removed, there will be enough funding to provide 100 per cent of benefits.

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Some will say: “Wait a minute! When you retire, Social Security benefits have a cap on how much you can get, no matter how high your wages were. Therefore, it makes sense to have a limit on how much in wages gets taxed while you are working.”

This is why some politicians argue against scrapping the cap completely, and advocate instead for raising it to a much higher amount of annual wages, such as $250,000.

On the other hand, we can point out that Social Security was never intended to be a system where what you get exactly equals what you had put in. It was designed, from the very beginning, to have a progressive effect of giving more help to people who need more help – that is, people who worked for low wages all their lives.

That's why, when your initial benefit is calculated when you first go on Social Security, low wage earners get a higher per cent of their previous wages than workers who had enjoyed higher wage incomes.

And of course, how much you ultimately receive in total Social Security benefits in your retirement years depends heavily on how long you happen to live. Pretty much no one gets back exactly what they put it.

Now back to our original point: Since we need to improve Social Security's funding to ensure full retirement benefits for today's young people -- and for the sake of making the payroll tax fair -- tell the candidates to: Scrap the cap!

*Threats to the Safety Net
*What we need to do about it

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