Raising the amount of income subject to Social Security taxes would be a bad way to try to shore up the retirement benefits program, a Social Security analyst says.
Mark Warshawsky, a member of the Social Security Advisory Board and a former assistant Treasury secretary for economic policy, delivered the argument against increasing the taxable maximum today during a hearing on Social Security’s finances organized by the House Ways and Means Committee’s Social Security subcommittee.
Warshawsky, who has been a research director at the TIAA-CREF Institute, New York, told lawmakers that he was appearing on his own behalf, rather than as a representative of the Social Security Advisory Board or any other organization.
Increasing the amount of annual earnings subject to Social Security taxes is a frequently mentioned proposal, Warshawsky said.
Recently, he said, a deficit reduction commission has proposed increasing the “taxable maximum” until the country is taxing 90% of the total earnings of the labor force.
The commission would increase the amount of the taxable base by 2%, and that process could take until about 2049. If the increase were completed with one step in 2012, the taxable maximum would increase to about $215,000, from $106,800 today, Warshawsky said.
“This is a very large tax increase on about 10 million of our most productive workers,” Warshawsky said, according to a written version of his remarks posted by the Ways and Means Committee.
The shift would mean that 99% of workers would be subject to Social Security taxation on all earnings, up from about 94.5% today, Warshawsky said.
Warshawsky said the revision would:
- Unfairly target a specific segment of the population that has not seen particularly large gains in earnings.
- Be an extra burden in addition to the new taxes imposed on this and other groups to finance Medicare and health insurance coverage expansion.
- Cut private retirement savings.
- Represent an unnecessary expansion of the Social Security program.
The “taxable coverage” ratio, or percentage of earnings subject to Social Security taxation, has ranged from a low of about 71% in 1965 to a high of 90% in 1983, Warshawsky said.
In 2009, he said, the ratio was about 86%.
Some policymakers like the idea of increasing the taxable maximum because they believe it would address increases in income inequality, but most of the income gains have gone to workers in the top percentile, who today earn more than $215,000 per year, Warshawsky said.
“Many of the workers earning above $106,800 are in their early 50s at the peak of their earnings profiles, after years of hard work at lower wages, supporting growing children and perhaps a low-earning or non-working spouse,” Warshawsky said. “These workers have also been hit hard in recent years by rapidly rising health care and education costs, without the assistance and relief given to lower-paid workers and retirees in the recent health law and other legislation.”
Those workers are already facing significant increases in payroll taxes, and they likely would be better off using their income to pay into private savings vehicles than to build up Social Security, Warshawsky said.