If you missed last week's spirited discussion, a solid majority supported elimination of the limit on income subject to the Social Security portion of the FICA tax. At the time, I thought that this alone couldn't possibly be enough to fix the problem.
I was wrong. Let's crunch a few numbers and suggest a preliminary fix. Then take the poll to register your (lack of) support.
The big question: how much more would Social Security take in if the limit on income subject to FICA was eliminated? And how much is needed to "fix" the problem. Here's some figures for 2006...
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Total Medicare (Part A) revenue from FICA: $180.3B
Total Social Security revenue from FICA: $534.8B
The FICA tax is 2.9% for Medicare (no limit) and 12.4% for Social Security (for the first $90K)
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From this we infer...
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Total wages subject to FICA/Medicare: $6218B
Total wages subject to FICA/SocialSecurity: $4313B
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One third of all wages are earned by those earning more than $90,000/year? Gak.
My statement from the Social Security folks tells me that, in 2040, income will only be 74% of benefits. Well, if the numbers in 2040 are anything like they are now, eliminating the limit will take care of the entire problem, yielding $1.06 for each dollar of benefits.
If eliminating the limit is overkill, what can we do to bring things in line with expected benefits? How about reducing the rate? How about taking it down from 12.4% to 10%? That would be a benefit for 90% of us and for many small businesses (who give very few employees more than $90,000 each year). At a 10% rate and with no limit, Social Security's 2040 revenues would cover 86 cents of each dollar of benefits (if the wage profile then is similar to today's).
Now, where have we heard about making all income subject to taxation and reducing the rate? Of course! It's Steve Forbes' "flat tax"! What wonderful irony! The next time your favorite Grover Norquist wannabe starts mouthing off about how we need private accounts to save Social Security, you can answer, "No, we just need to institute a flat tax." and then watch Grover's head explode.
So, that's the proposal. Eliminate the limit on income subject to FICA, and reduce the rate to 10%. Maybe it's phased in over the next ten years.