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Increase the Payroll Tax Cap?
Lately I've been too busy to follow the news very closely, but apparently Bush has stated he's open to the idea of raising the cap on income subject to payroll taxes:
Why is anyone surprised by this? When I listened to the State of the Union address I immediately realized he wasn't ruling out an increase on the cap:
The idea has always been on the table. And it's incredibly popular among people who oppose any form of privatization.
But it's a terrible idea.
A person's benefits are based strongly on the amount they've contributed. If a person contributes more because the cap is lifted, they'll be entitled to higher benefits when they retire. There is no net improvement in the system's finances unless that person's (time-adjusted) benefits increase less than their contributions. Which is to say, there's no net improvement in the system's finances unless you're robbing that person blind.
Stated so clearly, raising the cap on payroll taxes is reprehensible. It's all the worse when you consider also the political risks of the system. Its finances are so bad that I and many other young people are convinced the system will be means-tested by the time they retire. Because I save responsibly, I won't quality for benefits at all. Because I have a high income and look forward to the day when my income exceeds the payroll tax cap, lifting the cap would increase my forced contributions but give me exactly zero benefit. As I said, robbery.
The payroll tax cap should be lowered. It should be zero. Participation should be voluntary.
Today, payroll taxes bring in more money than needed for current benefits. The amount of this surplus will continue growing until about 2008 (according to Alan Greenspan's recent testimony). Then the surplus will start shrinking. That's the date when the government will need to reach out for additional funds. Not 2018, when the surplus reaches zero. Not 2042, when the trust fund is exhausted. 2008 is the date that matters, because that's the date when the Social Security surplus will each year contribute less and less to the general fund, and Congress will need to compensate for the shrinking "extra" revenue.
Lifting the payroll tax cap would push out the 2008 date, and only in that sense does it help the system's finances in the short run. But if you believe these high-earning taxpayers will be net beneficiaries from the system, you must also believe the long-run problem is made worse by raising the cap because the additional accrued benefits will exceed the additional revenues. If you believe these taxpayers will be net losers from the system, lifting the income cap is tantamount to robbery.
Those are your alternatives. Lifting the cap either makes the long-run problem worse, or it robs people, depending on your expectations about future benefit payments. Not an appealing alternative, is it?
Here's a better idea. I don't think it's superior to allowing individuals to opt-out, but it's pretty good.