Removing the Social Security Earnings Cap

Introduction & Background

We analyzed the taxable earnings of the top 200 Chief Executive Officers in the US during 2010 and calculated their contributions to the Social Security Trust fund with and without an earnings cap. Our objective is to use the CEO findings to illustrate the feasibility of easing the long-term financial burden of financing Social Security by reducing or eliminating the Social Security cap on earnings.

Our work was motivated in part by recent budget and deficit discussions in Washington. Given the importance of Social Security not only in reducing poverty among American families but in improving health outcomes for the elderly, we hope to contribute to the current dialogue on the importance of sustaining Social Security as a safety net for all Americans. If we fail to consider Social Security’s impact on reducing poverty and extending life, we will jeopardize the most important safety net ever created for America’s elderly. Before they radically alter Social Security for generations to come, policymakers should look closely at how the program benefits our entire society, especially as we continue to struggle through a tough economic climate.

Removing the Earnings Cap

The rise in income inequality over the last 30 years combined with an earnings cap on the taxable contributions to Social Security has meant that those at the very top of the income distribution, who have reaped virtually all of the economic gains, are contributing a smaller and smaller share of their income to Social Security. Surveys cited from all sides of the ideological spectrum, from the Heritage Foundation ¹to the AFL-CIO, ²have shown how dramatically the ratio of average CEO compensation to worker pay has risen from 30-40:1 in the late 1970s and early 1980s to 250-360:1 during the last few years (Figure 1).

Cited in Domhoff GW. Wealth Income, and Power. Available at: http://sociology.ucsc.edu/whorulesamerica/power/wealth.html

The average taxable earnings of the top 200 chief executive officers in 2010 was nearly $14 million dollars each ($13,761,738), on a combined total of $2.8 Billion dollars in taxable earnings (Table 1). ³ Based on the Social Security salary cap of $106,800, this generated a total of approximately $2.6 million dollars ($2,648,640) to the Social Security Trust fund (Table 2). This translates into the average CEO paying less than one – half of one percent of their income in Social Security taxes compared to the 6.2% for the average worker. If the salary cap were removed, the top 200 CEOs would have contributed more than $341 million dollars ($341,291,106) towards Social Security.

Table 1.

Top 200 CEOs, Taxable Earnings & Contribution to Social Security Trust Fund, 2010

Table 2.

Top 200 CEOs, Social Security Contributions: With and Without Earnings Cap, 2010

Last year, the Congressional Research Service reported that if no changes were made beyond removing the salary cap, the fiscal integrity of the entire Social Security system would be preserved over the next 75 years. ⁴In addition, the payroll tax could be immediately lowered from 12.4% to 12.12%. Due largely to the wage stagnation over the past few decades, the vast majority of the working population (94%) in 2007earned less than the amount of the salary cap that year. Thus, removing the cap would affect only a minority (approximately 6%) of well-compensated workers even over the long run and could have the benefit of aiding struggling families through a reduction of the payroll tax.

There is ample precedent for removing the Social Security cap on earnings. When the Medicare tax was introduced in 1966 it was set at the same rate as that of Social Security. As part of the Omnibus Budget Reconciliation Act of 1993, that cap was eliminated so that all earnings became subject to the Medicare tax. ⁵

Conclusion

Modest changes are needed to keep Social Security fiscally sound over the next 75 years. But the projected shortfall is less than one percent of the gross domestic product. ⁶As we have demonstrated, drastic cuts being seriously considered such as reducing benefits, cutting the cost of living adjustment, and raising the retirement age, are not required to meet the 75 year full funding actuarial balance and could indeed prove harmful.

Social Security has been and remains the most effective income-support program ever introduced in the United States. But this is true not just for the elderly. Even less known is the impact on the young; more children benefit from Social Security than from any other cash program, including TANF (Temporary Assistance for Needy Families). ⁷

Social Security has also improved older Americans’ health and longevity. In an earlier study, we analyzed the effect of Social Security on health. ⁸ After separating its impact from other factors that have likely played a role in improving health over the last century and controlling for changes in the economy and access to medical care (including the growth of antibiotic use and Medicare), we found that while mortality rates for all adults fell during the 20th Century, in the decades following the introduction of Social Security, rates of decline for those 65 and older showed a more dramatic change than for other age groups. By contrast, rates of mortality decline for the younger age groups remained virtually the same during this period. The trend was particularly pronounced following the creation of Social Security and again soon after lawmakers increased benefits through legislation and indexing of benefits to inflation in the 1960s and 1970s.

The political discourse around Social Security focuses exclusively on the system’s long-range financial problems rather than on the benefits of improved health and reduced poverty. By not considering the benefits of reduced mortality and poverty reduction, policy-makers are grossly underestimating Social Security’s benefits to society. Drastic cuts are not needed and the unintended adverse impacts upon Americans of all generations could be felt for decades. A far simpler solution is to abolish Social Security’s earnings cap.

References

¹ Heritage Foundation. Spotlight on CEO Compensation. Available at: http://www.heritageinstitute.com/governance/compensation.htm#The_Ratio_of_Average_CEO , accessed July 22, 2011.

² AFL-CIO. Trends in Executive Pay. Available at: http://www.aflcio.org/corporatewatch/paywatch/ceopay.cfm , accessed July 22, 2011.

³ Taxable earnings were based on a survey of the top 200 CEOs by Equilar, 1100 Marshall Street, Redwood City, CA 94063 . Taxable earnings were calculated based on annual compensation for each chief executive which included base salary, cash bonuses, the value of stock awards which vested during the year, the value of option awards exercised during the year, and other compensation.

⁴ Mulvey J. Social Security: Raising or Eliminating the Taxable Earnings Base. Congressional Research Service, No. 7-5700, September 24, 2010.

⁵ Social Security Administration. Update 2011. Available at: http://ssa.gov/pubs/10003.html , accessed July 21, 2011.

⁶ Social Security Administration. 2011 OASDI Trustees Report. Available at: http://www.ssa.gov/oact/TR/2011/II_D_project.html#105057 , accessed July 22, 2011.

⁷ National Center for Children in Poverty. Available at: http://www.nccp.org/topics/socialsecurity.html , accessed July 22, 2011.

⁸Arno, P.S., House, J.S., Viola, D., Schechter, C. Social Security and Mortality: The Role of Income Support Policies and Population Health in the United States. Journal of Public Health Policy . 2011; 32(2):234-50. [ abs ]

Issue Brief prepared for The National Committee to Preserve Social Security & Medicare Foundation by

Peter S. Arno, PhD & Deborah Viola, PhD
Center for Long Term Care Research & Policy
School of Health Sciences and Practice
New York Medical College