Question

Analyze the following solutions to the problem of social security. a.       The FICA tax is increased

Income plus social security payments cannot exceed the poverty level.

The total amount of social security benefits received cannot exceed the amount paid in by

the employer and employee plus interest earnings on those amounts.

Answer 1

We know that Social Security benefits include old-age, survivors, and disability insurance (OASDI); Medicare provides hospital insurance benefits for the elderly.  Social Security faces a significant — though manageable — long-term funding shortfall, which policymakers should address primarily by increasing Social Security’s tax revenues. If policymakers elect to reduce Social Security benefits, those cuts will need to be limited and carefully targeted to avoid causing significant hardship. Moreover, the cuts will almost certainly be phased in slowly, which means they could not produce significant savings for many years. Increasing Social Security’s revenues will be necessary.

(a) If FICA tax is increased, this means government has more money to transfer it to the needy people and manage the requirements well. Hence, the social security increases. Also, Changes to the tax rate would affect all covered workers and would not change benefits. Increasing rates alone could close the entire solvency gap; even a modest change, such as a gradual increase of 0.3 percentage points each for employees and employers (or less than $3 per week for an average earner), could close about one-fifth of the gap.  

(b) Income plus social security payments should not exceed the poverty level. However, it becomes extremely difficult to define whom to get lower taxes from. Further, in case of a crisis, or deterioration of the economy, no buffer would be available.

(c) Raising the cap would help mitigate the erosion of Social Security’s payroll tax base caused by rising wage inequality. Most workers’ taxes would not change, while the degree of increase in high earners’ taxes would depend on whether the cap were raised or eliminated. Raising the tax cap could increase higher earners’ benefits as well, depending on how policymakers treated newly taxed earnings. Changes to the tax cap could close roughly a quarter to nearly nine-tenths of Social Security’s solvency gap, depending on how they were structured.