Raising Social Security tax on wealthy could add billions

WASHINGTON -- Increasing Social Security taxes for the wealthiest Americans could raise more than $100 billion a year -- enough to shore up the retirement system's finances for 75 years, pay for President Bush's plan for private accounts, or part of each.

As it is, only the first $90,000 of a workers' wages are subject to the tax, but Bush says he's willing to consider changing that.

Raising taxes, even if on the rich, is a risky political proposition. Both Republicans and Democrats distanced themselves from the idea Thursday.

"I don't know too many Republicans who are interested in doing that," said Sen. Rick Santorum, R-Pa. "I personally see this as one of the least attractive options."

Senate Democratic leader Harry Reid of Nevada said his party would be attacked for advocating tax increases if it embraced the idea. "We're not going to fall for that," he said.

Bush said Thursday that members of Congress should feel free to make any such proposals "without political retribution."

"It used to be in the past people would step up and say, 'Well, here's an interesting idea.' Then they would take that idea and clobber the person politically," Bush said at a news conference. "What I'm saying to members of Congress is that we have a problem, come together and let's fix it, and bring your ideas forward."

On Capitol Hill, Senate Democrats described Bush's offer as a ploy to get them to put forward unpopular proposals.

They said they remained opposed to his plan, and they unveiled a Web site calculator designed to show workers they would be worse off than under current law.

While Republicans said the idea of subjecting more wages to Social Security taxes would not be popular, most didn't rule it out.

"It's something I would not do myself, but the soup's not done yet," said House Speaker Dennis Hastert.

Different people have different ideas about how to use the money such changes would generate.

Some would put the cash into helping eliminate the system's long-term financial problems.

As is, beginning as early as 2018, the system is set to pay out more in benefits than it collects in taxes. And by 2042, the money stored up from past surpluses will be exhausted and Social Security will only be able to pay 73 percent of promised benefits from the revenues it will be taking in, according to the program's trustees.

Eliminating the cap on wages subject to taxation would push those dates back. An analysis written last week by Social Security actuaries found that eliminating the cap would mean the system would continue to collect more than it paid out until 2025, and would stay solvent for 75 years, the window traditionally used to evaluate the program's finances.

The system stays solvent for a bit longer than 75 years if you raise taxes on these high earners but don't raise their future benefits to match. As is, retirement benefits are tied to the taxes paid during working years.

Either way, beyond about 75 years, the system will face trouble again because people are living longer and collecting benefits for more years, and this trend eventually would overtake the additional revenue.

Bush wants a permanent fix, and he says his plan for private accounts would help achieve it. This would allow younger workers to divert 4 percentage points of their tax into personal accounts that could be invested in stocks and bonds, which have historically earned more than Social Security trust funds do.

But it costs a lot to move to this system -- more than $1 trillion in the first 10 years, and more after that.

That's because younger workers will be diverting money to personal accounts that the system needs to pay current benefits. One way to fill the gap would be to raise the cap on the taxation of wages.

A handful of plans circulating on Capitol Hill suggest raising the limit on wages subject to Social Security taxation.

Under current law, wages up to $90,000 are taxed at 12.4 percent for Social Security, with employers and employees splitting the tax. People who work for themselves pay both shares.

Just 6 percent of American workers earn more than $90,000 per year, and wages over this threshold are not taxed for Social Security. In all, there is $845 billion in payroll that won't be taxed by Social Security this year.

Bush has long said he is firmly opposed to raising the 12.4 percent tax rate, but until this week he and his advisers had been intentionally vague about whether he would rule out increasing the wages subjected to taxation.

The impact of doing so would be felt on the wealthiest Americans. It could cost a worker earning $120,000 per year $1,860 more, and his employer the same. A worker who earned $150,000 would pay an extra $3,700 in taxes, with her employer paying an equal amount.

Eliminating the cap altogether would generate about $105 billion per year in 2005 dollars, although some of that money would be dedicated to Social Security's disability program. That's more than $1 trillion over a decade.

Some lawmakers propose raising the cap but not eliminating it. Raising the limit so that wages up to $160,000 were taxed, for instance, would generate about $525 billion over 10 years.

Sen. Lindsey Graham, R-S.C., suggests lifting the cap to $200,000 a year, which would raise nearly $1 trillion over a decade -- nearly enough to pay for the transition.

Derrick Max, who heads a coalition of businesses that want private accounts, said the business community opposes raising taxes, but could wind up supporting a lifting of the cap as part of a comprehensive plan.

"That's a huge hurdle for us to be able to sign off on," he said. "It's not an impossible hurdle; it's a huge hurdle."