SOCIAL SECURITY RUSE; REFORM' PROPOSAL FALSELY CLAIMS SYSTEM IS BENEFITING `THE RICH'.

Byline: Gary M. Galles Local View

ATTENTION all potential voters earning $68,400 or less a year! Your neighbors who earn more than that pay a smaller fraction of their income in Social Security taxes than you do.

Such a regressive tax must be remedied. We propose to solve this inequity by applying Social Security taxes to all earnings, not just earnings up to $68,400. That would not only eliminate the regressivity of Social Security, it would allow us to ``buy down'' the payroll tax rate on the rest of you from 12.4 percent to 10.6 percent (still split between the employer and employee). Given today's high taxes, what could be fairer than that?

Boiled down to its essence, this is the political sales pitch being put forward for a Social Security ``reform'' proposal sponsored by Sen. Edward Kennedy, D-Mass. Doing nothing to solve the long-term insolvency of Social Security, it instead focuses on the fact that most of us could lower our taxes by raising them on ``the rich.'' And since we are supposedly solving an unfair advantage of the rich in the process, we can quiet our consciences that this just represents ``more for me'' greed on our part.

Unfortunately, as appealing as this sales pitch is designed to sound, its central premise that Social Security is regressive, treating higher income workers better than lower income workers, is false. In fact, Social Security treats lower income workers far better than higher income workers, and every serious student of the system knows it.

The claim that Social Security is regressive really reflects the fact that our contributions are proportional to our earnings up to $68,400, but further earnings are not subject to the tax. The result is that while those who earn more pay far more in Social Security taxes than lower earners, those taxes represent a smaller percentage of their income.

However, this supposed break for the rich is based on looking only at Social Security taxes, while ignoring the benefits recipients will receive in retirement as a result, which is highly misleading. Including the future retirement benefits those taxes will entitle workers to, which is necessary for an accurate evaluation of its effects across income groups, Social Security is already highly progressive (so that if anyone has a claim to be unfairly treated by the system, it is high income earners).

One way to see this is to look at what are called replacement rates - how much of preretirement earnings Social Security replaces. For a single earner who retired at 65 in 1993, Social Security replaced 59 percent of monthly earnings for low earners, 44 percent for average wage earners, but only 25 percent of taxed earnings for an earner with an income at the Social Security tax cutoff. A higher income earner gets a far smaller return on their contributions than an average earner, and less than half the return of a low earner. These sharply different replacement rates simply reflect Social Security's benefit formula, which is heavily tilted in favor of lower income earners. The taxation of benefits for higher income retirees magnifies this difference.

Another way to view Social Security's distributional consequences is to compare the present value of its lifetime net benefits for different earners. The House Ways and Means Committee found that in 1992 dollars, a single low earner retiring in 2000 would gain a net $27,983 from the system and an average earner $14,833, but a high income earner would lose $23,129 (and the numbers are far worse for two earner couples, since both must pay Social Security taxes without proportionate increases in retirement benefits).

Not only is Social Security, properly measured, highly progressive now, but extending taxes to higher levels of earnings would make it even more so (since the low replacement rate received from those added taxes would not contribute much to retirement benefits). Further, it would substantially boost the cumulative tax rates of high earners, with adverse consequences (Steven Entin of the Institute for Research on the Economics of Taxation estimates that affected workers' earnings would fall by 5 percent to 6 percent, reducing income tax revenues as well).

Social Security's financial problems did not arise because high earners benefited at the expense of lower earners. Rather, they are inherent in benefit promises which differentially help lower earners, but vastly outweigh the system's ability to fund them. Raising or eliminating the earnings cap on Social Security taxes would dramatically increase disincentives facing high earners (who already pay a disproportionate share of all federal taxes), while delaying real moves toward reforming the system, to ``solve'' a regressivity problem that does not really exist.

Imposing huge costs to solve an imaginary problem with Social Security, while ignoring the major problems that it does face, may be a good political use of voter envy, but it is a far cry from good policy.