Higher Elderly Salary Cap Seen Cutting Deficit : Study Shows $3.2-Billion Savings From Increase in Payroll, Income Taxes

The federal government could reduce the deficit by as much as $3.2 billion by allowing senior citizens on Social Security to earn more at work without sacrificing their benefits, according to a study unveiled Thursday by Republican congressmen.

“Our seniors are perfectly willing in many instances to continue working . . . but they always weigh what the cost is,” said Rep. Ron Packard (R-Carlsbad), a lawmaker active in the fight to raise or eliminate the earnings ceiling.

Announced by the Republican Research Committee, the study concludes that “increased work effort will lead to higher federal income and payroll tax revenues that will more than offset the increased payout of Social Security benefits.”

Although past efforts to reduce the penalty on Social Security recipients who hold jobs have been unsuccessful, the GOP study could revive debate on the issue.

Supporters of a higher earnings limit contend that it would encourage thousands of retired Americans to re-enter the work force, increasing the nation’s productivity and alleviating labor shortages.

But opponents are skeptical that the cost of providing increased Social Security benefits to elderly workers would be offset by higher income and payroll tax collections.

At a Capitol Hill press conference, Rep. J. Dennis Hastert (R-Ill.), who heads a GOP task force on Social Security issues, vowed to use the study to push for congressional approval of an increase in the earnings limit for those who retire at the normal age of 65.

Hastert and Packard introduced bills earlier this year to eliminate the limit, but the legislation has languished in committee.

“During the August recess in our district,” Packard said, “the loudest message we got from senior citizens came in two forms: One, change the funding mechanism for the catastrophic health bill . . . and the other was to remove the earnings cap on Social Security.”

More than 900,000 people now suffer some loss of Social Security benefits because they earn more at work than is permitted under the ceiling.

The Social Security Administration contends that getting rid of the earnings limit beginning next year would cost the federal government $2.9 billion the first year and more than $40 billion over the next decade.

Frank Battistelli, a spokesman for the Social Security Administration, said his agency and the authors of the study obviously made different assumptions about how many seniors would return to work if the limit is lifted.

Loss of Earnings

Under current law, seniors 65 to 69 who receive Social Security lose $1 in benefits for every $2 they earn above an annual limit of $8,880. Early retirees ages 62 to 64 have a lower earnings limit of $6,480.

The limits apply to wage earnings but not to investment income and there is no earnings limit for those 70 and over. The earnings ceilings are scheduled to rise next year to an estimated $9,360 for the 65-69 age group and $6,840 for early retirees, and the benefit penalty will be reduced to $1 for every $3 in earnings.

The Senate in June approved an even higher ceiling and a further reduction in the penalty, but the legislation is believed to be dead because a child-care bill to which it was attached is no longer expected to be considered by the House.

The study said the government could increase net revenues to a maximum of $3.2 billion a year by increasing to $36,360 the annual earnings limit for Social Security beneficiaries ages 65 to 69.

Eliminating the limit altogether would yield a net revenue increase of only $140 million, the study concluded.

The figures were developed by researchers working for the National Center for Policy Analysis, a free-market think tank, and the Institute for Policy Innovation, both based in Texas. Rep. Dick Armey (R-Tex.) heads the institute, which helped pay for the study.

SOCIAL SECURITY CHANGES: THE EFFECT

Social Additional Social Security Security Additional Net Increase Earnings Limit Benefits Paid Tax Revenue in Federal Revenue (in 1990) (in millions) (in millions) (in millions) $9,360 0 $38 $38 $10,352 0 $877 $877 $12,763 $37 $2,013 $1,981 $17,727 $125 $2,984 $2,864 $24,817 $553 $3,423 $2,875 $31,908 $1,133 $4,041 $2,913 $43,041 $1,719 $4,906 $3,192 $63,818 $2,658 $4,906 $2,253 Unlimited $4,773 $4,906 $140

The table projects the estimated impact of increasing the amount of earnings allowed before the government begins to reduce Social Security benefits paid to senior citizens aged 65 to 69. The estimates, calculated at various possible earnings limits, assume that the additional benefits paid to recipients would be more than offset by higher income tax and payroll tax collections as many retired workers choose to re-enter the work force. Under current law, the government cuts Social Security benefits by $1 for every $2 of earned income above $8,880 per year for recipients aged 65 to 69. Beginning in 1990, benefits to those recipients will be reduced $1 for every $3 in earned income above an estimated $9,360.

SOURCE: National Center for Policy Analysis, Dallas.