Raising the payroll tax cap won’t solve Social Security’s problems

Mytheos Holt | Policy Analyst

That federal entitlement programs are heading for an increasingly unavoidable crisis has finally become conventional wisdom in Washington. What’s more, these programs unquestionably hold the lion’s share of responsibility for the country’s ever-increasing debt.

Originally meant to secure healthy retirements and healthy bodies as a bulwark of the American dream, our federal entitlements now act as simple wealth transfers from the financially strapped Millennial generation to their much wealthier parents and grandparents, thus inhibiting the former from achieving the economic upward mobility they so desperately need. There have been no shortage of proposed solutions to this vexing problem, notably the attempts by House Budget Committee Chairman Paul Ryan (R-Wis.) to alter the accounting for Social Security and Medicare.

But Ryan is not alone. At the Roosevelt Institute, Brian Lamberta, claiming to speak for the millennials who are most victimized by America’s entitlement crisis – offers the standard progressive solution: increase the cap on taxable earnings under Social Security.

It would be easy for a cynical observer to dismiss this notion as nothing but tax-and-spend leftist pablum. Indeed, Lamberta’s assurance to his readers that “Social Security can remain in perpetuity if we scrap the cap” sounds more like the glib conclusion of a freshman term paper than serious analysis. To his credit, he does acknowledge the justifiably dim view that most millennials hold of Social Security, and his solution might at least do something to make the disproportionately wealthy Baby Boomers feel the same sting that their less solvent children feel, and thus not to view Social Security and Medicare as simply free lunches.

Nevertheless, Lamberta’s belief that Social Security should continue “in perpetuity” as it is currently structured avoids addressing the great lie at the center of the program.

The economist Robert Samuelson has pointed out repeatedly that Social Security, far from being insurance against the dangers of old age, which merely gives recipients back what they already paid in. It is, in fact, nothing but “middle class welfare.” Quoting Samuelson:

Benefits shift; they’re not strictly proportionate to wages but are skewed to favor low-wage earners – a value judgment reflecting who most deserves help; and they aren’t paid from workers’ own “contributions.” But we ignored these realities and encouraged people to think they “earned” benefits and that Social Security is distinct from the larger budget. Politicians, pundits, think-tank experts and journalists engaged in this charade to spare Social Security’s 54 million recipients the discomfort of understanding they’re on welfare.

Adding to the problem is that the “Social Security Trust Fund” is more or less raided to pay current beneficiaries with no serious attempt to account for paying future beneficiaries and, in many cases, it continues paying people even after they get back all the money they paid in. Politifact puts this ugly reality very concisely:

Thus, Social Security is – and always has been – a transfer system from younger generations to older generations.

Put in perspective, this means that practically every reason one could have for preserving Social Security in its current form amounts to defending a program built on the lie that it is simply saving money for one generation that they will get back later. It is not. It is taking money from one generation in order to try to cover up that it squandered the previous generation’s money mostly on people who didn’t pay into it in the first place.

This is not to say that no Social Security program could be devised that acts as an efficient insurance policy for all Americans, or that acts as a humane wealth transfer such as might have been envisioned by Milton Friedman through the negative income tax. The current one may have been intended that way. But it has degenerated into a regressive program that cuts off the upward mobility of young people at the knees in order to fete mostly well-off elderly people, with no guarantee that the young will ever be able to see their money again.

A tweak to the payroll income caps might make this model sustainable until the millennial generation comes of age, but it’s not clear why anyone would want to enshrine the right of Americans to fleece their younger brethren once they reach a certain age.

Tags : paul ryan social security
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