The problem with the internet is that the message with the fewest words wins whether it is accurate or not. What one writer loosely summarizes, the next will quote with authority. That process continues until you have a cliché with the fewest words possible.
The cliché de jour in the Social Security debate is “Raise The Cap – Problem Solved”. The only problem with this idea is that no research actually supports the claim. Most people repeat the claim without actually having a source. Most writers that have a source cite opinion pieces which do not have any underlying research. In the rare case where the idea is associated to actual research, the loose summary does not connect to the actual research.
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If the $106,000 cap was raised, Social Security would be fixed for the next 75 years, and that is according to the Congressional Research Service[1]”There are problems with the loose summary. First, the research that the author cites does not say what the writer claims that it said. Second, the research is woefully out of date. Third, the research introduces a bias that supports the conclusion of the cliché. Finally, “fix” and “solvent for the next 75 years” are not close to the same thing. None of these points are important to the next thousand writers who have pounded the statement with complete authority until it is little more than urban myth.
The most basic problem with the loose summary is that the referenced research contradicts the claim. According to the article from the Congressional Research Service on page 13, Option 1 “Raising the cap” solves less than half of the solvency problem. Option 2, “Eliminating the cap” does not solve the entire problem. Option 3 “Eliminating the cap and capping the benefits” would make the system solvent for the next 75 years. And so, fact is conquered by brevity.
It is easy to confuse ‘fixing’ social security with “making Social Security solvent for 75 years”. They sound somewhat the same despite having nothing to do with each other. The reader needs to know that the projection for solvency includes all of the revenue that falls into the 75 year window, but only a fraction of the cost. For someone born in 8 years, the solvency number counts 49 years of revenue, and no projected cost for retirement benefits because those benefits fall outside the 75 year window. The financial stability of Social Security can continue to erode even if the 75 year solvency test is passed.
Even if you use the loose definition of ‘fixed’ and accept that ‘raise the cap’ implies cutting the benefits associated with higher contributions, this report was based on data from 2005 when the solvency of the Social Security Trust Fund was 2041 or 36 years. Since that time, the economy has lowered economic expectations for the system to 2033 or 21 years. So the research into raising the cap is based on data that is showed trillion dollars of solvency that isn’t there anymore. In 2011 alone, the Social Security system lost more than a projected trillion dollars of interest income.
What the reader also needs to know is that the research comes with a significant disclaimer.
“The reaction of high-earning workers and their employers to raising or removing the taxable earnings base is unknown and was not taken into consideration in the above estimates of the distributional, trust fund, and revenue impacts.”
~page 15
While the reaction to higher tax rates is unknown, it is predictable. Higher taxes lower wages. You will see people retire earlier or work less. You will see individuals restructure their pay packages away from wages to compensation which is not subject to the tax. Employers will have higher labor costs, which will lead to higher prices and lost jobs. The study systemically ignores a negative bias to its conclusions.[2] Basically this research will overstate its results.
The overstatement is apt to be serious because the higher taxes in these proposals target a group of people that area net-contributors to the system. Not all people contribute equally to the Social Security system. High-wage earners statistically get back less money per dollar contributed than low-wage earners. So any policy that incents high-wage earners to leave or avoid the system will be much more painful than one that reduces participation rates of the whole.
The fact is that I don’t know how raising the cap would affect Social Security, but neither do the people who claim that it would solve the financial imbalances of Social Security. What I can tell you is that there is no research to support the statement raising the cap will make the system solvent for 75 years, much less sustainable. What research that does exist contradicts the statement. And that what research that exists is as favorable to the statement as is possible. In short, it is an internet myth.
[1] Congressional Research Service, “RL 32896 Social Security: Raising or Eliminating the Taxable Earnings Base”, Janemarie Mulvey
[2] The author of the study said that the response to higher taxes was debatable, and referenced this study which suggests that the impact would be negligible. CRS Report RL33943, Increasing the Social Security Payroll Tax Base: Options and Effects on Tax Burdens, by Thomas L. Hungerford. Read it understanding that payroll taxes with no deductions are vastly different from income taxes with deductions.
