your connection to The Boston Globe

A tax hike targeting top earners enters Social Security debate

Lawmakers steer away from idea

WASHINGTON -- Increasing Social Security taxes for the wealthiest Americans could raise more than $100 billion a year -- enough to shore up the retirement system's finances for 75 years, pay for President Bush's plan for private accounts, or part of each.

As it is, only the first $90,000 of a workers' wages are subject to the tax, but Bush said he is willing to consider changing that.

Raising taxes is a risky political proposition. Both Republicans and Democrats distanced themselves from the idea yesterday.

''I don't know too many Republicans who are interested in doing that," said Senator Rick Santorum, Republican of Pennsylvania. ''I personally see this as one of the least attractive options."

Senate minority leader Harry Reid, Democrat of Nevada, said his party would be attacked for advocating tax increases if it embraced the idea. ''We're not going to fall for that," he said.

Bush said yesterday that members of Congress should feel free to make any such proposals ''without political retribution."

''It used to be in the past people would step up and say, 'Well, here's an interesting idea.' Then they would take that idea and clobber the person politically," Bush said at a news conference. ''What I'm saying to members of Congress is that we have a problem, come together and let's fix it, and bring your ideas forward."

On Capitol Hill, Senate Democrats described Bush's offer as a ploy to get them to put forward unpopular proposals.

''He's not going to get us negotiating against ourselves," said Reid, demanding the president produce a complete plan first.

Democrats said they remained opposed to Bush's plan, and they unveiled a website calculator designed to show workers they would be worse off under the president's plan compared with current law.

Republicans said the idea of subjecting more wages to Social Security taxes would not be popular -- but they did not rule it out.

''It's something I would not do myself, but the soup's not done yet," said House Speaker J. Dennis Hastert.

Different people have different ideas about how to use the money such changes would generate. Some would put the cash into helping eliminate the system's long-term financial problems.

As is, beginning as early as 2018, the system is set to pay out more in benefits than it collects in taxes. And by 2042, the money stored up from past surpluses will be exhausted and Social Security will only be able to pay 73 percent of promised benefits from the revenues it will be taking in, according to the program's trustees.

Eliminating the cap on wages subject to taxation would push those dates back. An analysis written last week by Social Security actuaries found that eliminating the cap would mean the system would continue to collect more than it paid out until 2025, and would stay solvent for 75 years, the window traditionally used to evaluate the program's finances.

The system stays solvent for a bit longer than 75 years if you raise taxes on these high earners but do not raise their future benefits to match. As is, retirement benefits are tied to the taxes paid during working years.

Either way, beyond about 75 years, the system will face trouble again because people are living longer and collecting benefits for more years, and this trend eventually would overtake the additional revenue.

Bush wants a permanent fix, and he said his plan for private accounts would help achieve it. This would allow younger workers to divert four percentage points of their tax into personal accounts that could be invested in stocks and bonds, which have historically earned more than Social Security trust funds do.

But it costs a lot to move to this system -- more than $1 trillion in the first 10 years, and more after that.

That is because younger workers will be diverting money to personal accounts that the system needs to pay current benefits.

One way to fill the gap would be to raise the cap on the taxation of wages.

A handful of plans circulating on Capitol Hill suggest raising the limit on wages subject to Social Security taxation.

Under current law, wages up to $90,000 are taxed at 12.4 percent for Social Security, with employers and employees splitting the tax. People who work for themselves pay both shares.

Today (free)
Yesterday (free)
Past 30 days
Last 12 months
 Advanced search / Historic Archives