About Face

Social Security is back in the news. Obama wants to change the amount of wages subject to the Social Security tax. Currently only the first $102,000 of earned income is taxable. To shore up SS’s finances Obama wants to subject income above $250,000 to the Social Security tax as well.

My guess is that the average American has no idea that Social Security taxes only the first $102,000 of someone’s income. Not only that, but the tax applies only to earned income. Investment income—interest, dividends, and capital gains–is entirely exempt. There’s a reason the program was structured that way. It was intended to be a pension and insurance plan. Contributions would be closely associated with benefits. That way, no one could say it was a welfare program, or a general tax to fund general government operations.

Acknowledging that premise, Alan Greenspan advised a Democratic Congress in 1983 to enact a Social Security tax increase so that the self-contained Social Security program could accumulate a reserve–and President Reagan signed it. At the time people were worried about exactly what we are worried about now: the baby boomers retirement. And their plan worked. By taxing the wages of lower and middle income workers Social Security has accumulated a $2 trillion reserve and is solvent through 2047.

At least that was the argument. A few years ago Bush led the charge in claiming that those reserves are a fiction. Taxes are taxes, he said. The federal government, taken as a whole, is in deficit. Therefore all those excess Social Security taxes aren’t really dedicated to Social Security. Its just general government revenue. In other words, he had no problem using a tax that exempts all investment income and all income above $102,000 to fund general government operations.

The bait and switch with Social Security revenue looked pretty outrageous to me. But, if that’s the plan for Social Security revenues, then we should certainly remove the cap and tax all income shouldn’t we? General government shouldn’t be funded by a tax that specifically exempts the rich, should it? Maybe that was some of the thought process behind Obama’s plan to tax earnings above $250,000.

In any event, I know Obama’s plan will be opposed by conservatives for the simple reason that it raises taxes on rich people. But I’m still picking my jaw off the floor after reading Lawrence Lindsey’s reason for opposing Obama’s plan. Lindsey you may recall, was a key Bush adviser and champion of the first tax cut:

There is a very good and principled reason why Social Security taxes are paid on just $102,000 of income: Benefits are calculated based on that same $102,000 of income. The fundamental principle of linking taxes and benefits was established when Roosevelt designed Social Security. He wanted to make sure that it was not a welfare system, calling Social Security “a base upon which each one of our citizens may build his individual security through his own individual efforts.”

That’s right. Obama’s plan would break “the fundamental principle of linking taxes and benefits”. Geez, guys. Is Social Security a program with a dedicated tax or not. You’re making me dizzy by reversing direction every few years.


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