Lift the Payroll Tax Cap: What Do You Think?


I’m going to write about math & money, again. (I’m already wincing.)

I’ve been reading several articles on the pros/cons of adjusting the payroll tax cap (also known as FICA). As of right now, the employer must withhold 6.2% of an employee’s wages and pay a matching amount in social security taxes until the employee reaches $102,000 for the year (in 2008). The total is 12.4% for the employee and the employer. Once that amount is earned for a given year, neither the employee nor the employer owe any additional social security tax for that year. Just under 6% of U.S. wage earners make more than $102,000 in wages, so many economists believe that raising the cap on the payroll tax to $200,000 would generate more income for the Social Security program and would not impact low-wage-earners in America.

Here’s a pro argument for adjusting the cap upwards:

Let’s remind ourselves that Social Security, which cut poverty rates among the elderly from 35% in 1960 to 9.4% in 2006, is no Robin Hood plan that robs the rich to pay for the retirement of the working class. Rather, it is a mildly redistributive public retirement program financed by contributions from the wages of working people. In fact, Social Security taxes fall far more heavily on the poor and working class than on the well-to-do. Payroll taxes are a fixed 12.4% (actually 6.2% on employees and 6.2% on employers); they are levied only on wage income, not on property income; and the cap on wages subject to the tax (the subject of the debate between Clinton and Obama) means that while most workers pay the tax on every dollar of their income, the highest earners pay it only on a part.

The con arguments against raising the payroll tax cap are even more political and partisan (if you can believe it) than the argument above. Those arguments can be found on the CATO Institute website, which is very thorough and goes into great detail about why Social Security is a failed American benefit. Basically, there’s a real push to privatize social security because the government shouldn’t be in the business of investing your retirement money or redistributing income & wealth.

So what do you think?

  • Is there really a social security crisis?
  • Should we raise payroll taxes to pay for it
  • Should we privatize social security?

Furthermore, does it benefit Human Resources professionals to get into these political discussions? What do we need to know about this issue? What do you know about this issue that other people don’t know?

Educate me, please.

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