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Payroll Tax Cut Raises Worries about Social Security’s Future Funding
By extending the payroll tax cut, Congress and the administration have quietly made a critical change in how Social Security is funded — one that some in Washington worry could undermine the program’s foundation if lawmakers keep renewing the tax break.
Since the entitlement program’s inception in 1935, many changes to Social Security have been enacted or attempted. For the first time in the program’s history, tens of billions of dollars from the government’s general pool of revenue are being funneled to the Social Security trust fund to make up for the revenue lost to the tax cut. Roughly $110 billion will be automatically shifted from the Treasury to the trust fund to cover this year’s cut, according to the Social Security Board of Trustees. An additional $19 billion, it is estimated, will be necessary to pay for the two-month extension.
The tax cut is supposed to be temporary. But as squabbles over this issue and the Bush tax cuts have revealed, short-term tax cuts in Washington have a way of sticking around longer than planned, especially as economic growth remains slow and lawmakers are wary of raising anyone’s tax bill.
The prospect of policymakers continually turning to the payroll tax as a way of providing economic stimulus troubles experts, some lawmakers and both public trustees of the Social Security trust fund. Their concern: that Social Security will lose its status as a protected benefit owed to every working American and instead become politically vulnerable, just like any other government program.
And as this year’s debate about the nation’s debt showed, nothing is off limits to the political brinkmanship that has come to dominate Washington.
“It’s a grave step for Social Security,” said Charles Blahous, one of two public trustees for Social Security and a research fellow with the Hoover Institution. “It just seems to me the program both financially and politically will be on a lot rockier footing.”
Robert Reischauer, the other public trustee and president of the Urban Institute, said extending the payroll tax cut another year during high unemployment seems justified. But it “could, if it continues for a substantial period of time, undermine one of the foundational arguments that makes the Social Security program inviolate.”
Since its inception under President Franklin D. Roosevelt, the Social Security program has been premised on a simple contract: Americans pay into the program’s trust fund over years of paychecks through the payroll tax. In return, when they retire, they receive monthly benefits.
The payroll tax cut changes that. Instead being a protected program with its own stream of funding, Social Security, by taking money from general revenue, becomes more akin to other government initiatives such as Pentagon spending or clean-air regulation — programs that rely on income taxes and political jockeying for support.
“All of a sudden Social Security will have to compete with every other program, whereas before it had its own dedicated revenue,” said Nancy Altman, co-director of Social Security Works, an advocacy group. “It’s breaking the kind of firewall that has always existed between the trust fund and the operating fund.”
She added: “The biggest concern is that this was done without any hearings, without any apparent regard for the impact on Social Security.”
The chief actuary of the Social Security trust fund has affirmed that the payroll tax cut will not put a dent in the $2.6 trillion fund, which is expected to pay all promised benefits until 2036. The law requires the government to make up any shortfalls.
The fund has been built up over time by contributions from the 12.4 percent payroll tax, of which employees and employers each pay 6.2 percent. The temporary tax break reduced the share paid by employees by 2 percentage points.
Altman said that the tax had never been reduced before, and the most it has been raised at any time is 0.5 percentage points.
“We’ve never really monkeyed around with Social Security before,” said Blahous. “Until now it was understood the payroll tax was supposed to do one thing. It wasn’t supposed to be a stimulus mechanism. Now the payroll tax is this variable thing that goes up and down according to other economic conditions. That is a real transformation of what that money is supposed to do.”
The pressure to cut the tax came from the country’s slow-growing economy. Last December, Republican lawmakers fought to extend the George W. Bush tax cuts, which were about to expire, while the White House pushed for a tax credit called Making Work Pay. Their compromise: a two-year extension of the Bush tax cuts, a year of extended unemployment benefits and a one-year payroll tax cut that effectively replaced Obama’s tax credit idea.
Last year’s payroll tax cut saved the average U.S. household more than $900, according to the Tax Policy Center.
During the fight earlier this month, Democrats borrowed from the Republican playbook, arguing that reverting to the old rate would be a tax hike. And economists worried that allowing the cut to expire would dampen economic growth in 2012 by as much as two-thirds of a percentage point.
The payroll tax cut could be here to stay for a while. Senate Majority Leader Harry M. Reid (D-Nev.) has said he will appoint a conference committee to search for ways to extend the two-month cut for all of 2012.
Blahous said Social Security will be facing enough financial pressures in the years to come without the payroll tax cut complicating matters.
This year, the Social Security system projects that it will pay out $46 billion more in benefits than it will collect in cash. It made up for the shortfall by redeeming Treasury bonds bought in years when there were cash surpluses.
Lawmakers on both sides of the aisle, including Sen. Bernie Sanders (I-Vt.), Sen. Jon Kyl (R-Ariz.) and dozens of House Democrats, have expressed concerns about the impact of the payroll tax cut on Social Security.
“Whether you’re on the left or the right, you should really dislike this,” said Blahous. “It has been somewhat mystifying, the determination to do this. I just think it’s shortsightedness.”
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83 Comments so far
Show AllTypical scare tactic, run for the hills, alarmist bullshit from WaPo. Either Social Security's funding is legally separate from the rest of the government's finances because of the dedicated FICA tax or it's funded out of general revenues as is military spending in the "Defense" Department. No one ever rings an alarm on the Defense Department going broke. Either way, Social Security is on sound financial footing.
Social Security may be on sound financial footing, but my retirement isn't. Thanks to Reagan, and then the Bushes, my employment record has a lot of gaps, which add up to loss of contributions over time. Now, with the Payroll Tax Cut cutting my contributions again, my retirement, which is now only a couple of years away, is not looking real good.
You see the real effects. You can see what they are doing to you.
A sound financial footing someone say's? It's another tax cut that lowers tax revenue that is already short. Only the financial illeterate in Congress could buy this type of tripe.
Social Security WAS "on sound financial footing" until Obama's "payroll tax holiday" started on 1/1/11, requiring the program to borrow more than $113 billion in 2011 and more in each subsequent year.
While stewarjt is correct in noting that "defense" has no problem being funded by the general fund, that is only because the military industrial complex owns enough politicians to keep the war funding flowing. Social Security recipients don't own any politicians. Congress therefore has no problem gutting the program.
Social Security was robbed during the Bush tax cuts, paying for Iraq, and Afganistan, GW's deal with big pharma and Medicare part D, Obama just kept on after Bush. But Social Security has not been secure since Clintons surplus was wasted.
More like Trillions, counting the F-22 and F-35 boondoggles! add the free money window @ the Fed that remains open to the big banksters! Then trying to give away 400 M1A1 tanks to Greece! for what a tax rite-off?!?!? and of course theres no money for social plans! SSI Medicare, get a Federial job! oops I forgot Obummer cut 250,000 and counting!
Time to storm the basteele I think!!! Before they re-monitize again! and what you have in your pocket ends worth nothing!
>^^<
Social Security Trust Fund money was not "robbed," it was borrowed. SS bought interest-bearing Treasury bonds with it's surplus cash, and Reagan signed a law allowing that borrowed money to be spent to cover his deficit-exploding tax cuts for the 1% and insane military spending. Both Reagan and Bush spent the borrowed SS money extremely unwisely, but they didn't steal it.
The theft, if any occurs, is in our future. It will come if the voters are persuaded that the money has been robbed, or has otherwise evaporated or disappeared.
If voters can be persuaded that SS is not viable, they may close their eyes while Wall Street's politicians (like Obama) cut benefit amounts or raise the retirement age. THAT would be theft.
Future benefits are based on how much YOU pay in FICA taxes.
At some point in the future, Congress will decide that these general revenue transfers do NOT count as your contributions, and future benefits will be reduced accordingly.
How, exactly how, do you know Congress's future actions? That is, how, exactly how, do you know the future?
A good guess would be the history of prior actions by Congress.
Follow the money.
Corporate welfare recipients dump boatloads of dough into political campaigns. Those contributions come with conditions attached, the primary condition being the diversion of funds from "domestic programs" and into more corporate welfare programs, the war machine being the biggest one.
With humans, unlike the stock market casino, past behaviors are the gold-standard predictors of future behavior. If someone screwed you over every week during this past year, they'll for sure try to do you again next week.
Well since the Congress critters didn't engage in the past behavior you fear. They didn't cut Social Security benefits int he past. Therefore, according to your logic, there's no reason they will take that action. That is, again, you don't know the future. No one does.
Congress didn't violate the right to due process until October 2006, Congress didn't require Americans to buy defective products from corporations until March 2010. Need I cite additional examples ? In recent years Congress has accelerated its unprecedented anti-contitutional actions.
Since the commie threat disappeared two decades ago, Congress has felt no need to toss the working class any more crumbs to keep them from going commie. Congress is now in the process of recalling the few crumbs they tossed out to the working class to keep commies at bay during the 30s.
Good points about the loss of due process and the mandatory defective products.
It should also be noted that just as it took a commie-hating right-winger like Nixon to "go to China," it would take a perceived leftie like Obama to "reform" (destroy) Social Security. Never before have we had a Republican masquerading as a Democrat in the White House. Social Security is at risk as long as Obama is president.
I agree and have myself used the "only Nixon could go to China" analogy for Obama/SS in the past, but i have to disagree that this is the first Rep masquerading as a Dem - he had a good teacher - Clinton. Welfare "reform", DOMA, NAFTA/WTO, repeal of Glass Steagle (?sp, never spell that right :) ) - you get the picture ...
I used to say that the reason Barack beat Hillary in the primaries was that he was a better Clinton than she was ...
Clinton was a DLC Democrat, a "new" Democrat, a "business-friendly" Democrat, but he was not a full-on Republican only pretending to be a Democrat, like Obama.
A few examples:
Clinton fought Republicans to reverse the Reagan tax cuts for the rich. Obama caucused with Republican leaders to EXTEND the W. Bush tax cuts.
Clinton slashed Reagan's out-of-control military spending. After W. Bush increased military spending again, Obama came in and increased it even further!
Clinton policies stopped the fall of real wages, provided a 60-year-low unemployment rate of 3.8%, and transformed massive budget deficits into surpluses. Obama's economic record is abysmal. As Elliot Spitzer said: “I’d never seen anybody as effective at lobbying for George Bush’s economic policies as President Obama.”
Clinton created 3 million new jobs/year, compared to just 1 million/year created during the 23 years of "trickle-down economics" presidents Reagan, Bush I, Bush II and Obama.
Clinton fought and beat the original Republican revolutionary, Newt Gingrich, over spending on education, environmental protection and public health. Obama has implemented Republican initiatives in each of these areas, and he remains silent as a new generation of radical, right-wing ideologues in Wisconsin, Ohio, Michigan and Florida make draconian changes in their states.
Clinton refused to engage in any foreign wars. Obama escalated Afghanistan, unilaterally attacked Pakistan, tried to extend Iraq past Bush's December 2011 pull-out, and is currently attacking Iran covertly.
Clinton never indicted anyone for leaking or whistle-blowing. Daniel Elsberg recently said "If Obama indicts Julian Assange it will be the fifth person he has indicted, and that will be four more than all previous presidents put together."
And, of course, Clinton never schemed to destroy Social Security.
Well, have to disagree with you - i say NAFTA, DOMA, repeal of GS, welfare "reform" all qualify him for Rep status, and I have heard, though cannot confirm, that he planned on going after SS but backed down when the Lewinsky affair made him feel he couldn't risk pissing off his base, And then there's the Iraq bombings and sanctions - and the half million Iraqi children deaths that were "worth it" to Clinton's Sec.State Albright .... So if that falls quite with in the category of legitimate, as opposed to "faux", Dem - gotta admit - think the difference is more a matter of quantity and not "quality", or lack thereof ...
As for a surplus - credit that to the tax windfall from the dot com boom - when that crashed so did the surplus ...
Obama is a schmuck for sure, but that doesn't get Clinton off the hook - he was more of a Rep than Nixon, LOL
Obama simply did his nominally Dem predecessor a few better - as i said, he out Clintoned a Clinton, as well as out Bushing a Bush.
Sorry you are a Clinton fan, but you are right on about Obama ....
"As for a surplus - credit that to the tax windfall from the dot com boom - when that crashed so did the surplus ..."
Thanks for revealing your High school/Fox News intellect with that profoundly stupid claim. I won't waste another second talking to you.
"since the Congress critters didn't engage in the past behavior you fear. They didn't cut Social Security benefits int he past."
Au contraire. Just because they don't call something a 'cut' doesn't mean it isn't happening. By changing the way the cost of living is calculated, and how it is indexed, they have been making sure that recipients don't get much or sometimes any COLA increases. IN my book, that means they have been 'cutting' the benefits for several years.
When, exactly when, did the BLS change the way the CPI for Social Security benefits is calculated? When did the COLAs stop?
After Republican President Ford and Democrat Carter lost their re-election bids (at least partly due to high inflation and high unemployment) in 1976 and 1980 resepctively, both parties reformulated the way the inflation rate (hence CPI), and the unemployment rate are calculated. By understating the rates of inflation and unemployment, incumbants now look better to voters, and corporations and govenrment can keep wages and benefits spiraling ever downward.
Obama's catfood commission and super catfood committee got their names from Obama and Congress's latest perverse CPI revison whereby rather than assuming that when people can no longer afford meat, they eat beans, the new CPI formulas will assume that people skip the bean diet and go straight from meat to catfood.
Prior to the 1986 bipartisan regressive tax reform, unemployment benefits were not subject to income tax. making them taxable was tantamount to a cut.
What are your references for the CPI and unemployment rate reformulations?
Surely you're more perceptive than that?
That someone used a six-gun to take your wallet a month ago, but a fountain pen to take your house last week, doesn't mean that he hasn't robbed you twice. Nor would it be wise of you to presume he won't be looking to hit you over the head and take your car tomorrow.
If the cap on F.I.C.A. deduction was removed from payrole deductions the Social Security Administration would be solvent for ever. Social Security is there for everyone. So shouldn't everyone pay into it in such a way to keep it healthy? The United States was designed as an all inclusive society. No one group of people has a legal right or privledge over another. When it comes to the health, wealth and security of the United States of America it is the responsibility if every American to do his or her fair share. There is no monarchy or aristocracy to keep us safe. This country was founded on the premise "WE THE PEOPLE"
"The United States was designed as an all inclusive society.... This country was founded on the premise "WE THE PEOPLE".
________________________________
Well... yes, as long as you limit inclusivity in "we the people" to privileged, white, male property owners. At this country's founding, "we the people" did not include those of African descent, Native Americans, women, or white males who did not own property. The US was founded on genocide, enslavement, and imperialism for purposes of maintaining and expanding the privileges of an elite, plutocratic oligarchy. Nothing has changed; privilege rules.
As others have rightly pointed out, there is nothing "shortsighted" about this 2% Social Security payroll tax deduction. On the contrary, it's a bipartisan ruse to begin the serial process of privatizing Social Security, which has been the goal for years. By cutting 2% from the payroll tax and then making up that loss from the general fund, Social Security can now be linked to the deficit. By linking Social Security to the deficit, politicians will then be able to claim that Social Security is not sustainable and must be "reformed," which is code for neoliberal privatization.
If the idea of the 2% payroll tax reduction was truly to provide some sort of relief to working Amerikans, then why link it to Social Security? Why not just give workers a straight 2% income tax deduction that is not linked to Social Security? I think the reason is obvious.
Many workers, esp. lower income, pay little or no "regular" income tax, so a 2 percent income tax deduction would mean little or nothing. All wage-earning workers pay FICA, however, and it's a big bite. Further, the 2 percent FICA tax break is two percent of *total salary* (unless your salary is over 110 grand or so) - so, calculated as a percentage of the worker's portion of the FICA tax, it's more like 30 percent. Thus, it's kind of a big deal. For a fifty-grand per year working stiff, it's a grand per year in cash money. Take a little vacation or buy a nice big-screen for that
The idea that it is only a small "2%" reduction in payroll tax is quite deceiving as far as the funding of SS is concerned. I have discussed this with various people over the last year it has been implemented and they seem to think it is only a 2% reduction of SS input from it's natural sources employer and employee. But if you take 2% off of the total cost of 12.4 % (6.2 % from employer and 6.2 percent from employee) then it is actually 16% of total funding of SS.
Obviously this is a major crack in the firewall of SS funding and is designed to lead to the eventual failure of SS as we know it. Because SS will not be paying it's own way and have to be made up by general fund like most other government expenditures it will become subject to constant criticism by it's detractors which are many in the corporate governed congress (courts and executive). What we see here is a crafty trojan horse introduced by the Obummer to create a death virus to SS so it can be handed over to his wall street buddies which they have been coveting for years.
It is similar to the deal the hope-a-dope president did with health care. There he forced people by law to by a inferior and thereby unwanted product and he seems to be continuing this process over to SS in that our retirement will first have to go through the hands of the casino wall-street gamblers with all their fees, duplicity and craven greed.
Yup, you got it. It's called "starve the beast", When he couldn't get his catfood commission to come up with a full fledged frontal assault on benefits, he snuck in the back door. Defund the program in the guise of a tax cut and when it can't fund itself as it has been doing since its inception, claim we can't afford it.
FDR specifically chose this way of funding it so it wouldn't depend on the the political whims of Congress to fund every year but be paid for by the beneficiaries themselves. Obama has undermined that. I saw what he was doing as soon as this deal was announced.
If he wanted to help out the little guy and keep SS intact, he could have given 'em a tax credit, or, if he were to reduce the payroll tax rate, accompany that with a lifting of the cap so that the program would continue to be adequately funded by the payroll tax. The fact that the only thing he did was cut the payroll tax gives his intentions completely away ....
The tax cut of 2% reduces the employees' portion of the payroll tax from 6.2% to 4.2%. The employers' portion remains at 6.2%. Otherwise, your points are correct.
You've been listening to Bill O'Riley again.
More scare tactic BS. The governments general fund already owes the social security trust fund a trillion or so dollars, how do you think Shrub and "Slick Oily" have been paying for their pet wars? That and borrowing money from that bastion of democracy Red China! You want to fix it? Start by cutting off the fingers and hands of the politicians that continually raid the trust fund. Start with Oblahblah and work your way down! Oh, and take a hundred dollars payroll deduction each week from every congressman and senator. Help them to feel our pain!
Prior to Obama, the general fund only owed the trust fund because it borrowed from the trust fund. It wasn't funding the trust fund. Now it is funding the trust fund. There is a difference between funding the trust fund and borrowing from the trust fund although in the end the government owes the trust fund. That is what this article is about..
If we would stop funding wars -we would have plenty of money.
If we would tax the rich,and corporations, we would have plenty of money.
If articles like these would stop being circulated, the media manipulation would not feed the fear and lies to the people.
A good article until,
"I just think it's shortsightedness."
This attack on Social Security is a scheme which was very cleverly packaged and follows in the footsteps of the scheme to hook people on Wall Street gambling through 401k's.
Underneath it all is the notion that any working person who is not paying money to Wall Street is being unpatriotic because patriotism is greed and gambling for greed.
This is further proof that the democrats are working for the same owners as the republicans.
Hardly shortsighted in its creation, implementation, and future continuation. It is another front in the war against equal justice and human rights.
Exactly! "Shortsightedness" is nothing but male bovine feces. What we really have is the execution of a Republican desire for the past two decades finally bearing fruit under the Democrat in Name Only. Anyone paying attention knew this on the day the tax cut was announced.
"Shortsightedness" follows the pattern of media and politicians blaming economic conditions on "incompetent" politicians and banksters who "made mistakes", when the reality is that the 1%'s scheme to transfer all wealth from the 99% to 1% is being executed with the precision of a Swiss watch.
It is not "shorsightedness", it is well executed long term planning.
Agree. Also, rather than this article being written on 12/30/11 by the WP, one could have learned alot of this throughout the past year simply by reading CD comments regarding the payroll tax.
This is getting to smell like another Mission Accomplished moment.
By initiating his "payroll tax holiday" that defunds Social Security Obama is assured of being the first politician to amass a corporate funded billion dollar campaign war chest which has been his sole focus since becoming president.
This year, the Social Security system projects that it will pay out $46 billion more in benefits than it will collect in cash. It made up for the shortfall by redeeming Treasury bonds bought in years when there were cash surpluses.
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The Social Security fund is EMPTY. Every last penny was spent long ago on wars, tax cuts and bailouts.
All that remains in the fund are "Special Interest Bonds", not Treasury Bonds, as this article erroneously implies.
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From the Social Security Website:
Trust funds and types of investments
The Old-Age and Survivors Insurance Trust Fund and the Disability Insurance Trust Fund comprise the Social Security trust funds. Both funds are managed by the Department of the Treasury through their Bureau of Public Debt. Since the beginning of the Social Security program, all securities held by the trust funds have been issued by the Federal Government. There are two general types of such securities:
Special issues—available only to the trust funds
Public issues—marketable Treasury bonds available to the public.
The trust funds now hold only special issues, but they have held public issues in the past.
http://www.ssa.gov/oact/progdata/specialissues.html
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These "special issue" bonds are worthless on the open market, meaning that they are nothing more than IOUs, promises from one branch of the government to pay another. New debt must be raised to pay for these worthless pieces of paper. This fact alone should cause a public revolt.
From CBS News
Social Security to Start Cashing IOUs
March 16, 2010:
But to illustrate the government's commitment to repaying Social Security, the Treasury Department has been issuing special bonds that earn interest for the retirement program. The bonds are unique because they are actually printed on paper, while other government bonds exist only in electronic form.
They are stored in a three-ring binder, locked in the bottom drawer of a white metal filing cabinet in the Parkersburg offices of Bureau of Public Debt. The agency, which is part of the Treasury Department, opened offices in Parkersburg in the 1950s as part of a plan to locate important government functions away from Washington, D.C., in case of an attack during the Cold War.
One bond is worth a little more than $15.1 billion and another is valued at just under $10.7 billion. In all, the agency has about $2.5 trillion in bonds, all backed by the full faith and credit of the U.S. government. But don't bother trying to steal them; they're nonnegotiable, which means they are worthless on the open market.
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Social Security must be publicly destroyed because it has already been privately destroyed. The fund is broke and therefore MUST be paid from GENERAL REVENUES by the issuance of new debt (or tax increases, spending cuts or money printing). They're trying to fool the public by calling the Social Security fund "Treasuries" when they're nothing more than "Special Interest" Treasuries (worthless IOUs). The charlatans who raided the fund and replaced marketable U.S. Treasuries with valueless pieces of paper need to be prosecuted to the fullest extent of the law.
It doesn't matter if they are worthless on the open market - frankly i wouldn't trust anything whose worth depends on "the open market". The key phrase is "backed by the full faith and credit of the US government" - Now that may seem no consolation to you, but what it means is that these bonds are worth every bit as much as bonds held by any US creditor, e.g. China, etc. If these bonds are worthless, so are China's - want to let them know?
The CBS News story is a total distortion of the truth. To the contrary,
"Some people worry when they hear that Social Security annual cash surpluses are loaned to the U.S. Treasury and the government spends the cash on other activities. This is not a misuse of Social Security funds. Regardless of how the government uses the cash, the Treasury securities held by the trust funds are a binding legal commitment for the Treasury to redeem the securities with interest when the money is needed to pay Social Security benefits."
["Social Security Finances: Findings of the 2010 Trustees Report," NASI.org, 8/10]
"Congress has always required that whenever Social Security runs a surplus, it invests that surplus in the safest investment on Earth -- interest-bearing Treasury bonds backed by the full faith and credit of the United States. There are several dozen civil servants at Treasury and the Social Security Administration keeping meticulous account of monies owed to Social Security. If the United States failed to pay the interest or the principal when demanded, it would default on its obligations, something that has never happened in the history of the United States. These are legal instruments, not casual "IOUs."
[Media Matters, 3/11/11]
See: http://mediamatters.org/research/201104140020
Lift the f@#&ing cap already!! Not one word about it in this article!
Now there is a sensible suggestion. Why should we have to pay 100% of a tax while others pay less because they make more?
The bigger the slice of the pie, the bigger the bill.
Although a real "hope and change" president would have pushed to lift the cap as soon as he took office, Obama has never even mentioned it.
Although a real "hope and change" president would have pushed to lift the cap as soon as he took office, Obama has never even mentioned it.
Too bad there's so many still smoking the hopium.
Just Say No!
>>Lift the f@#&ing cap already!! Not one word about it in this article!
Thanks for mentioning. I get tired of posting it every time the subject comes up and it never seems to get much traction. Even lose the employer contribution at $106,800 but let the individual part remain in effect. Why can someone make a magic income number where you no longer have to contribute the well being of all citizens? It's social insurance not a 401K.
Any politician mentioning lifting the cap will lose all corporate funding so you will never hear any politician mentioning it unless they think they can survive without corporate funding.