Eliminating the Payroll Tax Cap Undermines Social Security's Earned-Benefit Principle

Bernie Moreno and Elizabeth Warren have a New York Times op-ed proposing to eliminate the cap on Social Security payroll taxes, not the benefit it funds. Jack Salmon has made the case for why this proposal is not the solution they make it sounds to be: even full cap elimination with no added benefit credit closes only about 58 percent of the 75-year shortfall today. Over at National Review, Ramesh Ponnuru also explains that if we stack a 12.4% uncapped payroll tax on top of the 37% top income tax bracket, it will push the marginal rate on a top earner’s wages to 49.4% — the fastest run-up in the top rate since the 1930s, on a tax design that’s already more aggressive toward high earners than most of the advanced-country pension systems we’d be comparing ourselves to.

There is another big problem for Warren and Moreno. A few sentences after proposing to uncap the tax, Moreno and Warren say it’s essential to “safeguard Social Security’s earned-benefit structure.” The earned benefit part is an argument we always hear when anyone ever evokes making reforms to the insolvent program. It goes something like this: “Oh but I have paid into the system, and I have earned my benefits so you can’t touch them.” And in fact, Warren and Moreno use that rhetorical tool to at the beginning of their piece:

“Social Security is a core component of our nation’s promise — a covenant between the federal government and Americans who pay into it throughout their working years so they can retire with dignity.”

But here is the thing. They obviously don’t realize that earned benefit argument is precisely why the cap exists in the first place. As Ponnuru explain in the Washington the cap is here to keep benefits related to contributions. In other words, lifting the cap would partially sever the earned benefit intent of Social Security and turn it more into a general welfare program rather than an earned benefit. Indeed, their plan, by design, doesn’t credit the newly taxed earnings with any new benefit, which is precisely how it raises money. This fence that Democrats have erected for forty years around any conversation about the spending side of Social Security, such as raising the retirement age, means-testing benefits for high earners, slowing the COLA formula, adjusting the bend points, would go away if your lift the cap.

But if “earned benefit” is a real principle and not just an applause line, why does it only bind in one direction? They’re willing to sever the link between what someone pays and what they get back, the instant severing it raises revenue. The same senators who’d tell you a means-tested benefit cut breaks a sacred promise are asking a software engineer making $400,000 to pay tax on income that will never come back to her as a benefit and calling that preserving the structure.

You can’t have it both ways, and a serious reform conversation has to pick one. Either the earned-benefit structure is real, in which case it constrains the tax side exactly as much as the benefit side. Or it isn’t really a binding principle and then drop the act.