Should The Rich Also Pay For Our Retirement?

Recently, we've been hearing a lot about the suggestion that the rich should pay for some form of universal health care. Today, the Wall Street Journal suggests that the rich should also be paying for everybody's retirement -- by the government removing the income ceiling on Social Security taxes. It does so with the bold headline: "Pay of Top Earners Erodes Social Security." That's not exactly right.

The WSJ article states:

The growing portion of pay that exceeds the maximum amount subject to payroll taxes has contributed to the weakening of the Social Security trust fund. In May, the government said the Social Security fund would be exhausted in 2037, four years earlier than was predicted in 2008.

That's not really fair. The problem with Social Security has nothing to do with rich people making lots of money. The problem is that it's a poorly-designed scheme destined to fail. If the income gap makes it fail more quickly, that hardly means it caused the failure. After all, if the Titanic had hit a larger iceberg, it just would have sunk a little more quickly, but the result would have been the same.

What design would have worked? If, instead, Social Security were structured like private pensions -- where an individual's retirement benefits are paid through investments made by that individual -- then there never would have been a problem. But that's not how it works. Much like a Ponzi scheme, current "investment" is paying the "returns" of those now collecting benefits. That's what "erodes" the system.

However, the question of whether you should try to fix it by taxing the rich more isn't irrelevant. Certainly, more revenue for Social Security will make those payments flow more easily in future years. Taking more money from the rich is one way to do that.

What I think the author fails to realize, however, is that most people still view Social Security as a kind of investment. After all, each year we receive personalized Social Security statements, much like our quarterly 401k updates. The reality, however, is quite different. That money your Social Security statement shows is mostly already being distributed to the current elderly, not sitting in a vault at the Treasury.

If you want to go down the road of having the rich pay more for Social Security, it will be quite difficult to continue to perpetuate the fantasy that our Social Security taxes are an investment in our retirement. That might be okay, but it's a change we'd have to accept.

If the federal government decides to increase Social Security taxes for the rich, it might as well also just get rid of the notion that we have a separate tax for Social Security altogether -- just add that into our federal income tax rate. After all, at the end of the day, Social Security will just be another government expenditure.

Is that a good idea? It depends on your view of taxing the rich. If you have moral issues with excess taxation or think we're far to the right on the Laffer curve, then probably not. If you think the ends justify the means, then sure. This question would likely produce much debate. But no matter your view, it's absurd to blame the rich for Social Security's problems. Instead, blame FDR for knowingly designing a system doomed to fail.