Quote of the Day: On Radically Raising the Social Security Earnings Limit

From today’s OpinionJournal.com’s feature editorial (may require free e-mail registration), on reasons why NOT to raise the Social Security taxable earnings limit:

One answer is that Social Security was always meant to be run like a pension program where the taxes paid by workers are linked to the benefits they get back during retirement. Eliminating or substantially raising the cap would convert Social Security into an overt income redistribution program. If that is the direction Congress wants to go, we should all then end the pretense that Social Security is some kind of “universal” insurance program and call it welfare for poor seniors.

It is a fact, as noted here last week, that Social Security already is an income redistribution program. Call it “covert,” if you must, but the fact is that it gives people with relatively low lifetime earnings a significantly higher level of benefit compared to what they contributed to the system than middle and upper-middle income earners. Despite the redistribution noted, it is nevertheless a fact that a person’s calculated benefit incrementally increases for every dollar of payroll taxes they put in — just by a smaller amount at higher income levels. The idea that benefits would go up the more a person put in was considered one of the core and not-changeable principles of the program when President Franklin Delano Roosevelt sold the program to the American people in the 1930s.

If this core principle of FDR stays in place and the taxable limit is raised to $150,000, an idea that, incredibly, appears to be on the table now, we’ll see people retiring at their Full Retirement Age with annual Social Security benefits as high as about $32,000 for single people and $48,000 for a married worker and his/her stay-at-home spouse (who gets a half-benefit if he or she is the same age as the working spouse).

My guess is that tax-hungry legislators who want the cap raised don’t want to see benefit levels go that high, and that they will want to move to abandon yet another of the promises that FDR made when Social Security began (along with the one that Social Security benefits would never get taxed, that the earnings cap would never go above $1,400, and many others). I would expect that they will therefore move to limit the income included in the benefit calculations to something lower than the taxable limit; any taxes paid on earnings above the amount included in the benefit calculations will go into the proverbial black hole.

If that indeed occurs, the linkage the editorial refers to will indeed be broken. It will then be very clear to all with eyes that “welfare for poor seniors,” which really has been the correct term all along for describing Social Security (because current workers’ money is what is used to pay current benefits to retirees, i.e., there is no “Trust Fund”), will be the only correct term that accurately describes the program.

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UPDATE: Of course, tax-hungry Washington totally doesn’t comprehend the idea that a tax increase this extreme (about $6,000 combined for employer and employee earning $150,000 or more) will reduce the economic growth that could have been achieved, and make solving the long-term funding problem of Social Security that much more difficult, until we’re in a mess similar to that found in Germany.