A Social Security solvency solution: Tax the high earners

By Richard Buck – Special to The Seattle Times

The latest financial report on Social Security portrays a dire future of supposedly inevitable benefit cuts of 21%, starting in 2033, as the system continues to pay out more each year than it takes in.

This impending “crisis” has been well-known in government circles for at least 40 years. And so has a simple and fair solution: Stop giving workers with sky-high earnings a (nearly) free ride.

Right now, most workers are taxed 6.2% of their wages, but only on the first $168,600 they earn. After that, their Social Security obligation is done. That means the maximum annual contribution is $10,458.

Internal Revenue Service figures suggest that 10% of U.S. workers earn more than $170,000 a year. Those workers contribute less of their pay than the rest of us, yet they’ll most likely receive above-average benefits.  

A simple two-part solution could extend the life of Social Security as we know it for many decades. 

First, eliminate the $168,600 cap on wages subject to the tax. This is fair to everyone. 

Second, apply the 6.2% payroll tax to the total compensation of highly paid
C-suite executives. Despite their massive earnings and in some cases ridiculously high pensions, they will happily collect Social Security benefits, which currently max out at about $58,000 a year. This is money that they certainly will not need.

Think of Boeing’s CEO, Dave Calhoun. His total compensation last year was reportedly $32.8 million (a figure Boeing contests). Boeing most likely deducted $10,453 in Social Security payroll tax from his base salary of $1.4 million — and contributed its own share, for a total of $20,906.

Had he paid the same share of his total compensation as the average employee, it would have cost him $86,800 — an expense he certainly could have afforded.

Undoubtedly, Boeing and many other companies would easily find ways to circumvent such a change in the law. They could cap a CEO’s “salary” at $100,000, for example, and pay the rest in some form of compensation not subject to the Social Security tax. 

But an easy-to-understand second change would save employers all that trouble: Apply the payroll tax to executives’ total annual compensation as reported to the Securities and Exchange Commission — figures that every year are eagerly reported by the press.    

In Calhoun’s case, 6.2% of that $32.8 million would amount to a little more than $2 million. Certainly, he would feel that. But as a percentage of his compensation, the sting would be no worse than that felt by Boeing’s approximately 170,000 employees. 

Boeing would find a way to compensate him for this, and that compensation would be subject to Social Security tax as well. A win-win situation.

These two simple proposals would not fix the underlying problem with Social Security, which was designed when most people died before they could collect much, if any, of its benefits. And they might be politically impossible. 

But they would go a long way toward postponing any benefit cuts, and I believe they would give the overwhelming majority of workers a sense that they were being treated more fairly. 

Richard Buck was a Seattle Times business reporter from 1977 to 1997. Now retired, he lives in West Seattle.