Remove the Social Security cap on taxable wages?
The Olympian editorial page of Dec. 14 argues that Social Security’s cap on taxable wages should be ended because it is a taxes people of low and moderate income at higher rates than the high earners.
I have heard this argument many times. It is a favorite of progressives. The problem is that the people who make this argument rarely state both sides of the equation.
The “liberal” side is clear enough. Social Security is funded by a tax on labor income. If you tax annual labor income up to $113,700 (the limit in 2013) at 7.65 percent, and the income above is not taxed, your tax favors high earners.
But there is another side. The benefit favors low earners.
Here’s how a retirement benefit is calculated. Figure out your average monthly income taxable by Social Security over your 35 highest-earning years. Of that monthly average, multiply the first $767 (or all of it if it’s less than that) by 0.9. Multiply the next $3,857 (or all the rest if it’s less than that) by 0.32. If there’s more, multiply it by 0.15. Add the three products. If the sum is less than the benefit cap (which for retirees at age 66 this year is $2,513 per month) shrink your figure to the cap. That’s your monthly benefit.
The tax is capped because the benefit is capped.
And further: the system as a whole is progressive because of the way the benefit is calculated. That is, lower income people get a better deal from Social Security system than higher income people. It's designed that way.
And that's fine. But any argument to end the tax cap has to acknowledge that the system is already progressive. Not to acknowledge this while arguing that the cap is unfair is to deliberately leave the audience in the dark.
Achenblog by Joel Achenbach
Postman On Politics