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Obama revives '08 idea: Raise Social Security taxes on high earners

From msnbc.com's Tom Curry
Reprising a position he took while running for president in 2008, Barack Obama on Tuesday endorsed one of the proposals made by his Bowles-Simpson fiscal commission: increase the amount of income subject to Social Security taxes.

The Social Security tax is imposed only on the first $106,800 of annual earned income. The Congressional Budget Office said increasing the maximum amount of taxable wages to $170,000 in 2012 and beyond would raise $468 billion in revenue over ten years.

(Generally, the maximum amount of taxable wages goes up every year in line with average wage growth, but since 2009 it has remained at $106,800.)

Obama said in an interview with NBC’s Tim Russert in November of 2007, “I think that the best way to approach this is to adjust the cap on the payroll tax so that people like myself are paying a little bit more.”

He said Tuesday, “For the vast majority of Americans, every dime you earn, you're paying some in Social Security. But for (billionaire investor) Warren Buffett, he stops paying at a little bit over $100,000 and then the next $50 billion he's not paying a dime in Social Security taxes.” For billionaires, a large part of their income comes not from wages, but from capital gains, dividends, and other investment income. That non-wage income is not subject to Social Security taxation.

But of course, thousands of people do earn a salary of more than $106,800 a year.

In 2008 (the last year the Internal Revenue Service published data), more than 3.8 million tax returns showed salary and wage income of more than $200,000.

Why doesn’t a person earning $500,000 a year pay Social Security taxes on every last dollar of that income?

The answer begins with the architects of Social Security in 1935. An advisory committee appointed by President Franklin Roosevelt set the amount of wages to be taxed at $3,000. The reason, said committee member Princeton University economist J. Douglas Brown, was “aesthetic logic. $3,000 looked very good. It was $250 a month.” In 1935, per capita wage income was only $1,179. That was for the year, not for one week. (A dollar in 1935 had the buying power of $16 today.)

In the decades that followed, Congress periodically raised the wage amount subject to Social Security taxes, partly to pay for larger benefits for retirees. In 1977 Congress passed a law to link the taxable maximum to match annual growth in average wages.

From the beginning there has been some connection between wages earned and Social Security benefits received. A worker with a lifetime of above-average wages will get benefits higher than those of a worker with a lifetime of average or below-average wages.

But there’s a maximum Social Security retirement benefit. For example, for a worker retiring at age 66 this year, the maximum annual retirement benefit is $28,392. 

The CBO has said the link between earnings and retirement benefits “has been an important aspect of Social Security since its inception.” Raising Social Security taxes on higher earners would weaken that link between wages and benefits, the CBO said, because their benefits wouldn’t increase as much as their tax burden would.

Raising taxes on higher earners would make Social Security more of an income transfer program: taking money from those who earn more, and giving it to those who earned less while they were working.

To some degree, Social Security already does this redistribution in the way its benefit formula is designed, but Obama’s proposal would nudge the system further in that direction.