The most effective way to reform Social Security is to make adjustments to the payroll taxes that fund the system. Eliminating the maximum contribution cap, adjusting the system of employer contributions, eliminating some wage exemptions, and increasing the trust fund recovery penalty are all ways to accomplish this goal. In addition, greater attention and oversight should be paid in order to identify and eliminate fraud within the system.
For 2009, maximum earnings subject to FICA tax stand at $106,800.001. According to the U.S. Census Bureau, over thirteen million individuals make more than $100,000.00 in a year2. At a FICA taxation rate of 6.2% and an equal employer match of 6.2%, we are left with a tremendous opportunity for income. Critics would say that this additional tax would place an undue burden on the employers of these high paid workers, but by making a change to the manner that employers pay their share of the FICA tax, we can alleviate some of this pressure.
As the system currently dictates, individuals pay 6.2% of their overall earnings to FICA taxes, and the individual’s employer pays an additional 6.2%3. Companies with many low wage workers pay less under this scheme. By instituting a minimum employer contribution on such companies as Wal-Mart and McDonald’s, we can increase revenue for Social Security. Additionally under this system, low wage workers will have more money paid into Social Security, and thus will receive a higher benefit upon retirement age.
The current system of wage exemptions leaves room for improvement. Under the system in place now, the following exempt wages should be eliminated: Employee Achievement Awards, payment of sick pay more than six months after the employee leaves work, election workers paid less than $1,500.00 in a year, emergency workers serving on a temporary basis in response to a specific fire, storm, snow, earthquake, flood, or similar emergency, wages earned by employees of state or local government hospitals, newspaper carriers and vendors, Payments to general or limited partners of a partnership, payments subject to the Railroad Retirement Act, and wages earned by qualified real estate agents and direct sellers4. Clearly there is room for improvement regarding Social Security exemptions, as this list does not even exhaust all items in the tax code.
The current Trust Fund Recovery Penalty for unpaid Social Security taxes is equal to the amount of unpaid taxes. In order to raise additional revenue for the Social Security Trust Fund, the United States government should institute a penalty in addition to the replacement of additional funds. This penalty could be a flat rate, or a percentage of the unpaid funds.
It is no secret that Social Security needs to be reformed, but how to reach this goal is often debated. There are many routes that could be taken, and none of these routes are any less valid than the next. The ideas presented here are but a small fraction of the overall possibilities for the future of Social Security. There are many different viewpoints and ideas in the country, including privatization, partial-privatization, massive overhaul of tax code, raising the retirement age, and lowering payments. None of these ideas, nor the ideas presented in this memo, would be easy to implement. In fact, it will prove quite difficult to fix a system that has from the start been the subject of such controversy and upheaval. Much like health care reform, however, if the proper circumstances arrive, and if the proper players take heed of the issue, than it is possible that we will live to see Social Security Reform in our lifetimes.
4IRS Publications 15, 15-A