NCPA - National Center for Policy Analysis


June 1, 2005

Taxing all income and capping benefits would fix Social Security -- mathematically, at least. The program would run a permanent surplus if all income -- including the millions earned by athletes, movie stars and corporate tycoons -- were subject to the 12.4 percent Social Security tax and if benefits for the affluent were capped at current levels, according to the Social Security Administration.

Call it the Tiger Woods effect. The nation's highest-paid athlete -- $80 million last year, Forbes magazine estimates -- illustrates how Social Security tax hikes and benefit cuts would work:

  • Cut Woods' benefits. The golfer's benefit would be reduced by about $3,500 a year starting in 2042 when Woods turns 67, under the plan mentioned by Bush.
  • Tax Woods' first $140,000 of income. The golfer would pay an extra $6,200 a year if the amount of income covered by the Social Security tax were raised from $90,000 to $140,000, a figure on the high end of recent proposals.
  • Tax all of Woods' earnings. The golfer would pay $10 million in Social Security taxes a year, up from $11,160.

Besides devastating economic growth, increasing tax avoidance and reducing government revenues, taxing all income could create another problem: huge monthly benefit checks for the richest people. That's because Social Security benefits are based on the taxes people pay into the system.

If Social Security taxed all income -- not just the first $90,000 -- Woods would stand to get $5.9 million a year starting at his full retirement age of 67, based on his career earnings.

"It would be a political disaster" for Social Security to pay millions to millionaires, says David John (Heritage Foundation).

However, denying the affluent benefits for added contributions would also be a mistake. "That makes it a welfare program," he says. "It requires abandoning the idea that Social Security benefits are tied to the contributions," he says.

Source: Dennis Cauchon, "Can the rich, famous save Social Security? Solution works on paper but unlikely politically," USA Today, June 1, 2005.


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