A Stitch in Haste

A follow-up to my previous post on the President's unfortunate statement that raising the wage cap on Social Security taxes is "on the table" --

ITEM: The Wall Street Journal nails the issue --

But one of the ironies here is that the earnings limit for payroll tax contributions exists because that's the way Social Security's Democratic creators designed it. That is to say, they didn't want it to be perceived as a soak-the-rich welfare program, but as a "universal" compulsory savings scheme. Since payouts would be limited, it was only natural that contributions would be too.

Indeed. Note also the linguistic gymnastics of calling Social Security taxes "FICA Contributions" and the program itself "Old-Age Survivor and Disability Insurance." Sounds downright laissez-faire. It's also a crock.

Remember, the wage cap already increases every year. "From here to eternity" as the Journal phrased it.

ITEM: The New York Times, meanwhile, calls raising the wage cap (which must of course mean raising it even more than it's already scheduled to increase), as "modest." Yeah, about as modest as the Stamp Act.

ITEM: The Heritage Foundation, meanwhile, does what the Times apparently cannot: crunch the numbers --

A recent report from the Social Security Administration (SSA) examined the effects of not just raising the wage cap, but of eliminating it completely. Under this radical approach, Bill Gates and Donald Trump would pay Social Security taxes on every dollar that they earn. They would also receive benefits on those earnings. The scoring memo also examined a still more radical proposal: that people would pay Social Security taxes on all of their income but receive benefits only on income below $87,900, the wage cap that was used in the SSA study. This would be a major shift from the current policy that Social Security benefits are based on a worker's taxable income.
...
SSA's actuarial study showed that that eliminating the payroll tax cap entirely would only delay the start of Social Security's annual deficits by six years, from 2018 to 2024. Eliminating the wage cap on payroll taxes while paying benefits on only the first $87,900 of earnings would delay the start of annual deficits by an additional year, to 2025.

So, even implementing the "nuclear" option of eliminating the cap entirely, or the "nuclear + neutron bomb" option of scrapping the cap with no corresponding increase in benefits, only buys six or seven more years of solvency. And remember, scrapping the cap, in one stroke, would constitute the single largest tax increase in American history.

Fans of "scrap the cap" are not motivated by a desire to fix Social Security, to "restore equity to the system" or to help the working poor. They are motivated by hatred of the wealthy, pure and simple.

ITEM: Senator Lindsay Graham (Republican from South Carolina) has proposed a fascinating compromise, which is being called the "Doughnut." Graham's Doughnut would keep the current $90,000 cap (i.e., continue to screw the working poor), but would also allow an exemption (i.e., a "doughnut hole") on wages from $90,000 to $300,000, with all wages above $300,000 subject to Social Security tax. The logic being that those with incomes in the "doughnut" aren't really "rich" and should not be crippled with such a massive tax increase, and neither should their employers. Those earning above $300,000, on the other hand, well, they really are rich -- so screw 'em.

Now I won't lie, Graham's Doughnut would be great for me -- I'd be shouting "Ka-Ching! Ka-Ching!" from Manhattan all the way to Vegas. But there really is no intrinsic logic to the plan that I can see, other than the fact that the politicians can get away with it. Then again, there's little logic to Social Security at all, so there you go.

For Discussion: Is "Graham's Doughnut" a good idea? Why or why not?

Related Post:
Bush Caving on Social Security Wage Cap?

Paul Krugman lying yet again about Social Security:

But a determined defense by progressives in the media, on the blogs, and in Congress beat back one spurious argument after another, while the American people made it clear that they really want a program that guarantees a basic retirement income that doesn't depend on the Dow. And Social Security survived.

First of all, there is nothing more "spurious" than the fictitious and fraudulent Social Security "trust fund," which is nothing more than a solemn promise by the federal government — to raise taxes in the future, explode the deficit, or both.

Also spurious is the lie that any plan of voluntary* partial privatization would have to be invested in that most evil of contrivances, the stock market. One would think that such a supposedly brilliant economist as Paul Krugman might have heard of a money market fund — which would still outperform the returns Social Security offers its typical participant, and with zero risk to principal.

(*Sidebar: Isn't it interesting how the word "voluntary" is always conveniently omitted from every apologia for the status quo?)

But my main point is this: If it is indeed true that "the American people made it clear that they really want a program that guarantees a basic retirement income that doesn't depend on the Dow," then why not do exactly that? Why not abolish Social Security outright and simply replace it with a flat, egalitarian, public pension entitlement for all retirees equally — a program that guarantees a basic retirement income, paid not from a dedicated payroll tax but from general revenues?

If Krugman so correctly reads the American psyche, then he ought to advocate, indeed demand, the compete abolition of all FICA taxes. The federal government could replace those foregone FICA taxes by adjusting federal income tax rates and brackets, such that total federal receipts were not affected. It would be that much easier for employers (and the self-employed) to run their payrolls. Social Security's huge computation bureaucracy that must calculate credits earned, wage replacement formulas, etc., could be abolished and replaced with simple "Office of Retiree Check Printing."

And one more "benefit," at least to the Krugman types: Swapping FICA taxes for federal income taxes would be the single biggest "soak the rich" policy since the August Decrees. Far more redistributionist, incidentally, than that other radical liberal canard du jour, scrap-the-cap.

Remember: the working poor pay no federal income tax, but they do pay one-eighth of their income to Social Security (and Medicare). Surely the distribution of tax burdens would, if anything, become even more progressive if we swapped FICA for FIT, and surely any self-professed champion of the working poor would cheer such a proposal.

And yet they don't. Why?

Simple: Because, contra Krugman, the last thing in the world that apologists of Social Security want is "a program that guarantees a basic retirement income" (i.e., independent of any taxes paid to accrue such income).

There's another term for "a program that guarantees a basic income" — welfare. Americans love getting checks from the government, to be sure — but not when it's a welfare check. That's not a pension; it's a stigma.

The New Deal socialists who first devised Social Security recognized from the outset that the program must, at all costs, not be interpretable as "the dole." Yet the working poor would have seen a simple old-age pension entitlement as exactly that: They spend an entire career not paying any income tax, then suddenly they start getting checks from the government? That would be welfare, and that would be a dealbreaker. Thus was the FICA tax born.

What Americans really want is not a check from the government, but a check from the government that they can rationalize, that they need not feel embarrassed by. Which, one would think, would not be the prime criterion of "enlightened" central planner wannabes like Krugman.

One would think.

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UPDATE: Krugman has gone from blogpost to full-blown column. More thoughts from Greg Mankiw.