The Wall Street Journal’s Ellen Schultz today examines the Social Security payroll tax ceiling, writing that “the growing portion of pay that exceeds the maximum amount subject to payroll taxes has contributed to the weakening of the Social Security trust fund. In May, the government said the Social Security fund would be exhausted in 2037, four years earlier than was predicted in 2008.”
Schultz looks at two factors: first, the share of total earned income that lies above the $106,800 “tax max” and is therefore not subject to Social Security taxes, nor used in calculating benefits; and second, the share of total income that has shifted from the earned to unearned categories, such as benefits and stock options.
Regarding the share of earned income above the cap, Schultz says:
The data suggest that the payroll tax ceiling hasn’t kept up with the growth in executive pay. As executive pay has increased, the percentage of wages subject to payroll taxes has shrunk, to 83% from 90% in 1982. Compensation that isn’t subject to the portion of payroll tax that funds old-age benefits now represents foregone revenue of $115 billion a year.
While true, what Schultz doesn’t mention is that 1982 was a historical high for the percentage of earnings covered by payroll taxes. As I noted here, currently around 85 percent of earnings are subject to payroll taxes while the average throughout Social Security’s history was actually around 84 percent. So the current level isn’t out of the ordinary.
Likewise, Schultz notes that “Social Security data show that 6% of wage earners have pay that exceeds the taxable earnings base, and that their ‘covered earnings’ above the taxable maximum totaled $1.1 trillion in 2007.” Sure, but in 1980 8.8 percent of workers had earnings over the cap and in 1970 26.6 percent had earnings over the cap. It’s not as if the number of workers escaping taxation has increased.
Second, the shifting of income from earned to unearned categories is mostly a product of the rising cost of health benefits and the fact that benefits are not subject to either payroll or income taxes. Making them subject to taxes would equalize treatment, help Social Security’s finances, and provide an important incentive to hold the line on healthcare costs. Which makes it all the more puzzling that President Obama made his opposition to taxing health benefits a major part of his election campaign and continues to oppose it today.