A while ago, I was writing a long post about Social Security and the payroll tax that funds it, and why a) the Republicans had success pushing for giving individuals the power to direct their Social Security contriubtions and b) why the intermittent calls to remove the cap on SS payroll taxes are invariably a confession of ignorance as to how SS works. But my computer crashed midway through the post and I never got back to it.
Well, Megan McArdle cites an outstanding piece by Jacob Levy that discusses the subject in passing, more concisely than my would-be-efforts. He touches on all the important points:
If the payroll tax is just a tax, not something special like an insurance premium or forced savings-- that is, if it ought to be counted in a way that is detached from Social Security payouts at the other end-- then the tax system is barely progressive, and could be tipped into being regressive overall. If the payroll tax is not just a tax but something special that should be counted alongside the ostensible benefits it ostensibly purchases, then this is not true. The payroll tax is the largest share of the tax burden for (I believe this is right) most Americans. It is proportional-- but only on earned income, and only up to a certain income cap. So it makes a big difference in the overall calculations-- and how we count it makes a big difference.
I think that the payroll tax is just a tax, and that Social Security is just a spending program. But that's not the official position; and it's not ordinarily the position of those who support a continued state system of Social Security. Hence the desire to take Social Security off-budget, to treat its surplus as different from other state funds, and so on. Hence the unwillingness to means-test Social Security-- in order to preserve the illusion of social insurance "bought" with one's "premiums." Hence the unwillingness to lift the income cap on the payroll tax-- because then we'd either have to allow benefits paid to the richest retirees to skyrocket, or we'd have to admit that one's taxes don't really purchase one's own benefits. In other words, I want to concede that the payroll tax is just a tax, making the tax system as a whole borderline-regressive-- and then to insist on the consequences that follow from that. But I dislike any attempt to have it both ways-- to treat the payroll tax as just a tax for purposes of calculating regressivity, but to treat it as something quite different when it comes to discussing Social Security as a program.
(Emphases added.)
I can't count the number of editorials and opinion pieces over the years bemoaning the regressivity of SS taxes and advocating either cuts in the taxes paid or doing away with the income caps. Those pieces never (as far as I've seen) even address the ostensible relationship between tax contributions and future benefits that is at the heart of the way Social Security is sold to the population. The problem is exactly as Levy discusses: assuming the caps are raised or abolished, what "return" should the taxpayers get on contributions made into the system at the new income levels? If it is anything above zero, then a) you haven't helped the long-term sustainability of the system at all and b) eventual SS payouts will then be accordingly tilted in favor fo those who have made such large contributions - i.e., in favor of the "rich." Currently, the distribution of SS payouts is pretty progressive, and that is due to the income caps on contributions; abolishing those caps will make the distribution of SS payouts track the distribution of income and taxes paid in the country - i.e., not progressive at all.
On the other hand, if the "return" on such elevated contributions is zero, then you've just officially abandoned the "illusion of social insurance 'bought' with one's 'premiums.'", in Levy's words. In that case, SS is nothing but a (very effective) redistributive program - why not go about it more efficiently and means-test? Most liberals are horrified at the thought, as it goes counter to one of the main tenents of what Jonathan Cohn and Ed Haislmaier recently called the "Unreformed Church of Social Insurance of the Strict Observance." As Cohn described the rationale for that stricture in connection with a proposed prescription drug benefit:
In the real world, universal programs thrive while means-tested programs barely survive, if at all. As a case study, simply look at Medicare and Medicaid, enacted at the same time. Because Medicaid benefits only the poor, it lacks a constituency with sufficient political clout to protect it from cuts whenever Washington or the states start trimming budgets. Those cuts inevitably leave people on Medicaid without medical access, either because it doesn't cover particular populations--leaving them uninsured--or pays such atrociously low fees that many medical providers refuse it--leaving those with coverage without doctors to see.
You can't say that about Medicare. It has its bureaucratic problems, yes, but fees have never gotten so low that the elderly had the sorts of problems finding doctors that people on Medicaid have. And while there's still no prescription drug coverage in Medicare, the program's masters act pretty quickly to cover other treatments. The reason for this is that every senior citizen has a stake in Medicare; they let their congressmen know when they don't like what's happening to it. As a result, the congressmen keep the program strong by giving it enough money and watching over it carefully through oversight hearings.
So I guess you can count me as a member of the Church. I indeed think a Medicare drug benefit should be universal, because I fear anything else won't survive long politically.
The argument is professed with even greater devotion with respect to Social Security.
So if you're wondering why you read so many pieces bemoaning the inequality of capping the income subject to Social Security taxes and never hear of anything done about it, it's because - not for the first time! - there is a fundamental disconnect between the popular description of the problem and the underlying facts of the matter.
