Fiscal Cliff: How The Rich Could Save Social Security [Op-Ed]

Commentary | Social Security in a nutshell assumes the populace needs guidance in saving for their eventual retirement. The idea is that everyone is forced to set aside money and the government will manage it, ahem, wisely and invest the money until such time as it is needed. In theory that is how this entitlement program is supposed to work, but in practice the Federal government has mismanaged the money.

Social Security is supposed to start running out come the year 2033. But that estimate assumes Social Security exists in a bubble, which it does not. The Federal debt crisis and other factors related to the Fiscal cliff are likely to encroach on Social Security’s solvency.

Social Security was intended to be a self-financing program that would not add to the Federal deficit. According to, this was true until 2010 when benefit payments began to exceed payroll taxes regularly. In 2010 the Federal government had to borrow $37 billion to finance Social Security. Further borrowing in 2011 added over $130 billion to the deficit, with Congress enacting a “payroll tax holiday” as part of a compromise on extending the Bush tax cuts. According to USA Today, in 2012 Social Security will come up $50.7 billion short although I’m uncertain how much was borrowed, or added to the deficit.

When combined with interest on the debt, spending on entitlement programs like Social Security, Medicare, and Medicaid are projected to devour all government income within 13 years from now. All means all, with no money left over for the military or any other Federal government function. So how could the rich help save Social Security?

Social Security taxes are a flat tax. If you look on your pay stub you’ll see an amount labeled FICA. Because of the temporary “payroll tax holiday” FICA taxes are currently 4.2 percent, but it should soon return to the 6.2 percent baseline. Unless you are self-employed, your employer matches this amount to make 12.4 percent. But one thing many people don’t realize is that this tax only applies to the first $110,100 of income. This amounts to an annual Social Security tax “cap” of $13,652.40.

The kicker is that the rich don’t pay any more even if they’re making billions. Obama and the Democrats are now calling anyone who makes more than $250,000 “rich” so they’ll make a good baseline. Because of the Social Security cap the FICA taxes on $250,000 amounts to 2.7 percent instead of 6.2 percent.

Senator Mark Begich (D-AK) proposed the Protecting and Preserving Social Security Act which removes the cap and also increases benefits based upon the amount you put into Social Security. Combined with increasing the flat rate up to 12.5 percent the entire Social Security program would once again be self-financing until 2085, or until politicians screw it up again. A fully lifted income cap combined with capped benefits pushes the problem way outside our lifetimes.

One major potential snag is that once incomes reach a certain level expecting businesses to match the 6.2 percent might get ridiculous, which I’ve never seen any analysis address. Instead of demolishing the cap completely another idea would be to shift it. I would suggest a combination of the income cap removal, capped benefits, a business FICA-matching cap, “tying cost-of-living adjustments more closely to actual inflation, and bumping up the retirement age for able-bodied future retirees.” Combined all together Social Security should be saved and small businesses hopefully would not be too harmed as well.

Any legislation like this should also be accompanied with laws that prevent Congress from reaching into the Social Security piggy bank. The other issue is that Congress may choose to pander to certain demographics in the future and increase benefits spending at the expense of retired seniors of the future. This also should be prevented somehow.

The issue of fairness might come up when Congress is considering such a bill. After all, rich people will be putting billions of dollars into Social Security and it’s mostly the poor and middle class who benefit. They’ll also be getting less benefits under the proposed plan, but they’re unlikely to need their SS checks upon retirement, anyway.

The biggest concern is that this plan would amount to a large tax increase on not just those making $250,000 but on those making $110,100 or more, which in some parts of the nation is decidedly middle class income. So either people will need to accept receiving less Social Security benefits (as in, cut spending) or agree to a tax increase for even the middle class.

What do you think of this plan to save Social Security?