May 17, 2005
By Rea S. Hederman, Jr.
Representative Robert Wexler (D-FL) courageously broke ranks with
Democratic Party leadership to offer his plan to improve the
troubled Social Security system's solvency. Rep. Wexler deserves
praise for acknowledging Social Security's problems and offering a
However, his plan
is a step in the wrong direction. Wexler would increase taxes on
all wages above $90,000 by six percent. This tax increase would
impact millions of Americans, slow the economy, and cost jobs.
Specifically, the Wexler tax increase would:
And for all the
pain that Wexler's plan would entail, it would not even permanently
fix Social Security.
employers now pay Social Security payroll taxes on the first
$90,000 of a worker's annual income. That "wage cap" is indexed to
the growth of real wages in the economy and increases every year.
Workers and employers split the tax, each paying 6.2 percent apiece
on earnings under the cap.
Rep. Wexler would
maintain the cap but add on a new three percent tax that workers
and employers would pay on earnings above it. This amounts to a new
six-percent tax on wages that would be paid, just like the rest of
the Social Security payroll tax, by workers, in terms of its
The most obvious
shortcomings of Rep. Wexler's plan are that it would slow the
economy, cost jobs, and actually weaken other retirement savings.
Wexler's plan would raise high-earner's marginal tax rate by 6
percent, bringing the marginal rate for most of them to well over
40 percent on all taxable income. A tax increase of this magnitude
would have several economic repercussions. Economic growth and job
creation would be slowed as workers react to this tax increase.
According to the Center for Data Analysis's macroeconomic
estimates, Wexler's plan would reduce GDP by $33 billion per year,
on average, over its first ten years. In addition, it would reduce
total employment by an average of 340,000 jobs per year over that
extending Social Security taxes above the wage cap point out that
most workers would not face a tax increase, but that is not to say
that raising taxes on others would not affect them. When people pay
higher taxes, they have less to spend on goods and services, which
translates into fewer jobs and lower wages across the economy.
These indirect effects are especially apparent when those paying
higher taxes own businesses and employ workers.
Social Security wage cap would directly raise taxes on 3 million
small-business owners by billions of dollars. These small-business
owners make up about one-third of the nearly 10 million workers who
earn more than Social Security's wage cap. It is easy to see this
direct effect-more of small-business owners' wages would be exposed
to the payroll tax. However, what is not so obvious is that their
businesses would have billions less to spend on wages, to invest in
new buildings, to purchase new computers, and to expand and grow in
Many of these 3
million small-business owners do not file as single taxpayers.
Accounting for their families, these business owners are
collectively responsible for more than 4.5 million people,
including spouses and children. Altogether, this means that almost
8 million small business people would be directly affected by
Wexler's proposal-and that does not even include small businesses'
employees and customers.
The 3 million
small-business owners who would be affected by Wexler's proposal
account for almost one-third ($129 billion) of the wages paid out
by all small businesses.
Wexler's plan would disproportionately target workers in their
maximum earnings years who are near retirement. Nearly 10 million
workers exceeded the wage cap in 2003, according to data from the
U.S. Census Bureau's March Current Population Survey. Of these
workers, over 3.6 million are over 50 and over 600,000 are 62 years
Many workers over 50 are in their peak earning years and would be
hit hard by a tax increase on earnings above the payroll cap.
Workers over 62 may simply chose to retire early and avoid
altogether the sting of Wexler's Social Security plan.
In short, Wexler's
proposal would slow economic and job growth, especially in the
vital small-business sector. His proposal would reduce workers'
disposable incomes and, in turn, their personal savings.
Ironically, this decline in savings would make worse the very
problem that Social Security is intended to fix-workers retiring
without enough money for a decent retirement.
Wexler's Plan Would
Not Fix Social Security
For all of its
economic harm, Rep. Wexler's proposal would not even fix Social
Security's long-term financial problems. A recent report from
the Social Security Administration (SSA) examined the effects of
eliminating the wage tax cap while maintaining the cap for the
purposes of benefits.
This resembles a beefed-up version of Wexler's plan, applying a
12.4-percent tax to earnings above $90,000 instead of a 6-percent
tax. This larger tax hike would bring even more revenues into
Social Security than Wexler's proposal, but still it is not enough
to fix Social Security. SSA's actuarial study showed that
eliminating the wage cap on payroll taxes while paying benefits on
only earnings below the wage cap would delay the start of Social
Security's annual deficits from 2018 to 2025-just seven years.
Raising the wage
cap in this way would delay the onset of massive deficits by only a
few years. As Social Security now stands, annual deficits will
first reach $100 billion a year (in 2003 dollars) in 2022,
according to the 2003 Social Security trustees report. Subjecting all earnings
to payroll taxes but only paying benefits on income up to the
current wage cap only delays the start of those $100-billion
deficits until 2031.
If raising taxes
on earnings above the wage cap by 12.4 percent while holding
benefits steady only delays deficits by seven years, and
$100-billion deficits by 9 years, then raising taxes on those
earnings by just 6 percent would not even delay the crisis by that
savings, pension (if any), and Social Security benefits make up the
bulk of his or her total retirement security. Not only would
raising Social Security taxes reduce workers' savings, but it would
also make Social Security a worse deal than it is today.
Social Security is
a poor investment and a bad deal for the vast majority of workers
who pay into it. It offers most workers a rate of return on their
contributions that is several times lower than what they could get
from the most conservative investments, even assuming that retirees
live long lives.
For example, single men and women who die before retirement receive
nothing for their Social Security taxes. For this reason, black men
as a group have an especially low rate of return. On average, black
men paying into Social Security receive back less than their
payroll taxes-a negative rate of return. Younger workers who are
just now entering the workforce also face the likelihood of a
negative rate of return.
Rep. Wexler's plan
would force workers to pay more money into Social Security in
return for the same benefits. This would make Social Security an
even worse deal for them than it already is. Even more workers
would receive a negative rate of return, and all workers would
receive a lower rate of return for their payments into the
Rep. Wexler is
right to admit that we should take action to fix Social Security
sooner rather than later. Delaying Social Security reform is costly
and only makes reform more painful down the road. However, Rep.
Wexler's approach is misguided: it would hurt the economy and cost
jobs, make Social Security a worse deal for millions of workers,
and, for all that sacrifice, wouldn't even bring the system to
Rea S. Hederman,
Jr., is Manager of Operations and a Senior Policy Analyst
in the Center for Data Analysis at The Heritage
 See David C. John, "How
Today's Social Security Works," Heritage Foundation
Backgrounder No. 1827, March 2, 2005, at http://www.heritage.org/Research/SocialSecurity/bg1827.cfm.
Wexler offers details on Social Security plan," Associated
Press, May 17, 2005.
 See Norbert J. Michel,
Ph.D., J. Scott Moody, and Ralph A. Rector, Ph.D., "Raising the
Social Security Wage Cap Would Hurt Small Businesses," Heritage
Foundation Backgrounder No. 1845, April 19, 2005, at http://www.heritage.org/Research/SocialSecurity/bg1845.cfm.
 Rea Hederman, Jr., and
Tracy Foertsch, "AARP's Social Security Plan Would Raise Taxes for
AARP Members Without Fixing Social Security," Heritage Foundation
WebMemo No. 678, March 7, 2005, at http://www.heritage.org/Research/SocialSecurity/wm678.cfm.
 See, generally, David
C. John, "Raising the Social Security Payroll Tax Cap Does Not Fix
Social Security," Heritage Foundation WebMemo No. 667. February 16,
2005, at http://www.heritage.org/Research/SocialSecurity/wm667.cfm.
 Chris Chaplain,
Actuary, and Alice H. Wade, Deputy Chief Actuary, Social Security
Administration, "Estimated Long-Range OASDI Financial Effects of
Eliminating the OASDI contribution and Benefit Base."
 Social Security
Administration, 2003 Annual Report of the Board of Trustees of the
Federal Old-Age and Survivors Insurance and Disability Insurance
Trust Funds (Washington, D.C.: U.S. Government Printing Office,
2003), at www.ssa.gov/OACT/TR/TR03.
 See, generally,
William W. Beach and Gareth G. Davis, "Social Security's Rate of
Return," Heritage Foundation Center for Data Analysis Report
No. 98-01, January 15, 1998, at
Rep. Wexler deserves credit for stepping forward with a plan...evena misguided one.
Rea S. Hederman, Jr.
Director, Center for Data Analysis and Lazof Family Fellow
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