This Alternative to Social Security Cuts Would Tax Wealthy CEOs More — Is It a Viable Option?
Social Security cuts were not included in the debt ceiling bill signed earlier this month by President Joe Biden, but some lawmakers still hint that the program could see cuts in the future. One of those lawmakers is U.S. House Speaker Kevin McCarthy (R-Calif.), who recently said the bill was only “the first step” in a broader GOP agenda that includes further cuts — and he specifically mentioned Social Security and Medicare.
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Proposals to cut Social Security have gotten pushback from Democrats and senior advocates. However, there is a general consensus that something needs to be done before the program’s Old-Age and Survivors Insurance (OASI) Trust Fund runs out of money — which could happen as early as 2032. With only payroll taxes to support Social Security, benefits would be about 23% lower than they are now.
Among the alternatives to cutting Social Security are to reduce benefits for the wealthy, raise the Social Security payroll tax and/or raise the threshold on wages that can be taxed.
The current Social Security payroll tax is 12.4% of wages — 6.2% from employees and 6.2% from employers. Pushing those percentages higher is one way to bring more money into the program. Another option is to tax more wages. Currently, the payroll tax only applies to the first $160,200 in earnings. Any wages above that are not subject to Social Security payroll taxes. Taxing all wages above $400,000 would eliminate 61% of the budgetary shortfall, according to some estimates.
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Funding also could be raised by eliminating tax breaks given to corporate CEOs that let them build up massive retirement nest eggs without paying Uncle Sam, according to a recent The Hill column by Sarah Anderson, director of the Global Economy Project.
As Anderson noted, corporations can set up special deferred compensation accounts exclusively for CEOs and other top execs allowing them to “stash unlimited pre-tax earnings” in the accounts. Money keeps growing tax-free until the CEOs retire.
In contrast, 401(k)s and other tax-deferred retirement accounts for ordinary Americans come with strict contribution limits. Currently, the 401(k) limit is $22,500 a year for employees under age 50 and $30,000 a year for employees 50 and older.
“For all their talk about reducing debt, McCarthy and the Republicans refused to consider raising any revenue from taxing the wealthy,” Anderson wrote. “But instead of cutting benefits to Americans who’ve worked their whole lives, McCarthy’s new commission should call for getting rid of tax preferences for gilded CEO retirement accounts and use the extra revenue to expand retirement benefits.”
Taxing the Wealthy May Not Work, Some Say
But others suggest that simply taxing the wealthy won’t be enough to fix Social Security. This opinion was advanced in a February Washington Post column by Bloomberg’s Allison Schrager.
“The Biden administration’s only solution so far has been to increase taxes on high earners, starting with lifting the cap on earnings subject to payroll taxes,” Schrager wrote. “[But] rich people only have so much money and there’s a limit to what you can get by taxing them. Even if we could tax everything they own and earn, it wouldn’t be enough to pay for the government we already have, let alone the additional government many people want.”
Schrager provided the following example: Suppose a law was implemented this year that subjects all income above $160,200 to the 12.4% Social Security tax. A worker that earns $250,000 “now owes more than $11,000 in new taxes.” Assuming the worker doesn’t get a larger Social Security benefit in exchange for the tax increase, it “still doesn’t solve the problem,” according to Schrager.
“Eliminating the cap only covers 75% of Social Security’s long-term shortfall,” she wrote. “If the 12.4% tax kicks in on income above $250,000, only 73% of the shortfall is covered, and we get even less if the tax is applied only to income above $400,000, as Biden proposes.”
The bottom line, Schrager concluded, is that “we can’t create a government-supported middle class and rely exclusively on large tax increases on high earners and the wealthy to pay for it. If we try that, we’ll end up running large deficits to pay for mandatory spending each year even before any economic shocks — like high interest rates — come along.”
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This article originally appeared on GOBankingRates.com: This Alternative to Social Security Cuts Would Tax Wealthy CEOs More — Is It a Viable Option?
