Tuesday, July 21, 2009

Comments on WSJ tax max story over at AEI Blog

I've written up a short comment on today's Wall Street Journal story on the Social Security payroll tax ceiling over at AEI's American blog.


Joe said...

IN this AEI post you use a long time horizon to attempt to justify why we shouldn't raise the cap, and in your article on health care cost growth you used a short time horizon to say that recent changes have been pretty similar across countries. So which is it. You are leaving yourself wide open to the accusation that you will choose whichever facts suit your argument.

The rules governing the tax max were set around the time of the last major SS reform in 1983 when changes were explicitly made to tax rates and benefit levels. Doesn't that seem like the relevant reference period rather than farther in the past when both benefits and tax rates were lower, "indexing" was done ad hoc, and the demographic structure of the population was quite different? In what sense is the tax max in 1965 relevant to future policy choices?

Since 1983 the share of total payroll that goes to support the program has steadily been falling. In the last report I think the figure was 82.7% of payroll. If it continues to fall in the future, then I assume that means even a smaller share of worker's total earnings will be used to support the program. That seems like a major problem.

Andrew G. Biggs said...

The level of the tax max is a value judgment regarding how progressive we want the program to be. The point of looking over the long term is to show that we've had the tax max at around the same level as today throughout much of the program's history and there hasn't been a consistent feeling that the system isn't progressive enough. (With regard to health trends, the point was to look at where health costs are heading today; this isn't a value judgment but just a trend based on currently underlying factors.)

The most recent numbers from the 2009 Trustees Report are that a bit over 85% of total earnings are subject to taxation; this may go down a bit as the economy recovers (high earners have taken a bigger hit in the recession than low earners, at least proportionatly) but the ratio won't fall forever and the Trustees don't assume that it does.