DC is abuzz with debate about which inflation measure to use in determining Social Security COLAs (CPI-W v. Chained CPI-U). Regardless of the decision, the solvency of Social Security requires more fundamental changes. Changes on the spending side are well and good but an aging population requires greater revenue changes.
Rob McClelland of CBO writes:
Two versions of the CPI are currently used to index federal programs: the consumer price index for all urban consumers (CPI-U) and the consumer price index for urban wage earners and clerical workers (CPI-W). The methodology used by the Bureau of Labor Statistics (BLS) to calculate those indexes suffers from at least two drawbacks—substitution bias and small-sample bias. Both of those drawbacks cause those traditional versions of the CPI to grow more quickly than the chained CPI-U, an improved measure of overall inflation developed by BLS that is discussed below. Substitution bias has been recognized by economists for many years; small-sample bias has also been known for some time, but until recently, it has received little attention. (For more on small-sample bias, see BLS research here and here.)
and Emily Brandon of US News and World Report writes:
Adjusting the Social Security taxable maximum is one potential strategy that could improve Social Security’s finances. If Social Security’s tax cap was gradually eliminated between 2013 and 2022, it would reduce Social Security’s deficit by 71 percent. Or if the tax cap was increased over five years to include 90 percent of all earnings, it would reduce Social Security’s funding gap by 30 percent. Adjusting the tax cap would significantly increase taxes on the 5 percent of workers who earn more than the taxable maximum, but many proposals to adjust the tax cap would also give high-income taxpayers somewhat higher benefits when they retire. “Roughly half the additional taxes collected as a result of previous increases in the payroll tax cap resulted in higher benefits for those who had to pay the additional taxes,” says Alan Gustman, an economics professor at Dartmouth College.
Three quarters of people whose income exceeded the tax cap in 2011 earned less than $200,000, according to an Urban Institute analysis of Social Security Administration data, while 0.5 percent earned over $1 million. “Most people who earn above the tax cap earn right above it,” says Favreault. “There’s a lot of people who earn over the tax max just once or twice in their life, and another cluster of people who earn above it for 10 or 15 years.”
Increasing Social Security’s payroll tax cap is a popular idea, with 68 percent of Americans supporting the complete elimination of the cap, according to a recent National Academy of Social Insurance and Mathew Greenwald and Associates online survey of 2,000 Americans age 21 and older. A 2010 Gallup and USA Today poll found that this change also enjoys strong bipartisan support with 79 percent of Democrats, 60 percent of Republicans and 64 percent of Independents saying it’s a good idea to require workers to pay Social Security taxes on all of their wages.
Conclusion: Adopt the mantra ‘Scrap the Cap.’