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Saving the American Safety Net

by GERALD SCORSE

If raising the retirement age can save Social Security, the nation owes huge thanks to Ronald Reagan and Alan Greenspan. They raised it a generation ago, and retiring at 65 with full benefits is now history.

The rise to 66, where it is today—and a scheduled rise to 67—were buried in plain sight in the Social Security overhaul of 1983.  President Reagan had set up a commission, chaired by Greenspan, to put the system on sound fiscal footing. Almost unthinkable in today’s Washington, the panel became a model of bi-partisanship. Its report formed the core of a bill that Congress approved overwhelmingly.

The bill raised the retirement age by two months a year for anyone turning 62 from the year 2000 through 2005. As a result, the age for retiring with full benefits reached 66 in 2009.  It will stay at 66 through 2016. The second pushback, again at the rate of two months a year, will affect anyone turning 62 from 2017-2022.  For those born in 1960 or later, it will mean a full-benefit retirement age of 67.

And that’s it. The law “maintains age 67 for people reaching age 62 after 2022.” Recapping: 65 is toast, 66 is the new 65, and 67 arrives in 2027—unless Congress decides to revisit a classic political compromise.

The lawmakers of 1983 signed away two of the golden years, but they might have considered it a golden tradeoff. They acted like adults to shore up the system. Among its provisions, the reform taxed benefits for the first time and sent the revenues to the Social Security trust fund. The tax applied to half of total benefits, and was structured to exempt those most reliant on Social Security. Ten years later, President Clinton raised the portion of benefits subject to taxes to 85 percent. Once again, an income threshold restricted the levy to better-off beneficiaries.

With the health of Social Security again at issue, there’s good reason to make all benefits taxable. The levy on the last 15 percent would apply to taxable incomes of, say, $200,000 or more. Low-income recipients would continue to pay no tax on their benefits. Few middle class families would pay the new levy either.

In the spirit of ’83, Congress could also eliminate or at least raise the cap on the amount of salary subject to the payroll tax. Most workers pay the tax all year long, on every dollar they make, but not high earners; for them the tax stops at a given income, which in 2012 is $110,100.  Those making more effectively pay Social Security at a lower rate. Someone earning $220,200, for example, will pay at half the rate of those making $110,100 or less. By law, an increase in average wages triggers a like increase in the cap. While both have risen modestly, incomes at the high end have gone into orbit. Record amounts of income lie beyond the payroll tax—just when Congress wants the tax to do double duty.

The payroll tax has always paid for current beneficiaries. Through a series of hikes starting in the late 1970s, Congress gave it another job: building up the Social Security trust fund for the baby boomers.  Besides paying current benefits, workers for years have essentially been pre-paying on boomer benefits too.

Social Security shows America at its caring best.  It’s embraced by people of every stripe and pinstripe, Left and Right, coast to coast. The numbers-crunchers can calculate the system’s benefit projections and revenue needs. Then it will be up to Congress to do the right thing.

Another Congress long ago bumped up the retirement age. If Society Security needs more sacrifice, plain fairness says the revenue should come from the top. A 2010 report from the Congressional Research Service (CRS) agrees—and suggests that everybody could win.

The CRS ran the numbers on raising or ending the cap, finding that either one could reduce the system’s long-term deficit. Crucially: “If all earnings were subject to the payroll tax, but the [taxable] base was retained for benefit calculations, the Social Security Trust Funds would remain solvent for the next 75 years.” In other words, not only would Social Security be on firm ground; the benefits paid to high earners would no longer be capped, and would rise along with their taxes.

Congress is often berated for kicking the can down the road. Here’s a case where it could create a stunning political triumph.

Gerald E. Scorse helped pass the bill requiring basis reporting on stock market capital gains. He writes articles on taxes.

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