Outside editorial: Minimum wages aren't the problem, maximum wages are

Posted: Friday, July 31, 2009

The federal minimum wage went up 70 cents an hour on Friday, to $7.25 an hour, the third and last of the scheduled increases enacted by Congress in 2007. Let the standard arguments begin:

Con: It sets an artificial price on labor. It will drive small-business owners to the poor house. It will drive up all wages, creating an inflationary effect. It hurts teenagers and younger workers, with resulting effects on crime rates. With the economy in recession and unemployment pushing 10 percent, it's a terrible time to raise wages.

Pro: Minimum-wage workers tend to spend everything they earn, so this will have a stimulative effect. The minimum wage hasn't kept pace with the cost of living, meaning workers still have 18 percent less buying power than they did in 1968, when the minimum wage was $1.60 an hour.

The arguments mostly were muted this time, certainly less than in 2007, when the minimum wage rose from $5.15 to $5.85. Last year, when the minimum wage went up to $6.55, it happened in the middle of the economic meltdown and passed almost without notice. There were too many larger issues.

So, too, this year. The Bureau of Labor Statistics says that only 2.2 million American workers make minimum wage or less (restaurant workers are exempt in most states). That's only 3 percent of the hourly work force. That's probably an undercount, because some salaried and self-employed workers also make less than the minimum wage.

A bigger deal can be found at the other end of the earnings scale. The Wall Street Journal reported last week that in 2007, "highly compensated employees" (the 94 percent of Americans with earnings in excess of the ceiling on wages subject to Social Security taxes) took home more than one-third of total U.S. pay.

Six percent of the workers got 33 percent of the payroll. And that's just wages and salaries, not bonuses, stock options and other perks. Nor does it count investment earnings. It's payroll only.

In the five years ending in 2007, pay for these "highly compensated employees" increased by 48 percent, double the gain for those who earned less than $97,500, the Social Security ceiling in effect for 2007. The ceiling for this year is $106,800.

Here's why that's a problem: Everything in the way of wages earned over $106,800 isn't subject to Social Security taxes. If you earn less than that, you and your employer split a 12.4 percent payroll tax on it. The money goes into Social Security Trust Fund, which is expected to go broke in 2037.

Highly compensated employees in 2007 were paid $991 billion that was subject to payroll taxes and $1.1 trillion that wasn't. For this year, that works out to an estimated $115 billion that won't be going into the Social Security fund.

It's true that Social Security benefits max out this year, assuming you retire at age 66, at $2,323 a month regardless of how much you earned during your career. The ceiling is there on the assumption that regardless of the blessings of progressive taxation, a wage-earner shouldn't be taxed too far in excess of the benefits he can expect to receive.

But the trend clearly is disturbing. As the rich get richer, and continue swallowing ever-bigger pieces of the total U.S. earnings, the Social Security ceiling must be raised. Eliminating it entirely could extend the life of the trust fund for 75 years or more, the Social Security Administration estimates.

During the presidential campaign, President Barack Obama proposed extending payroll taxes for those earning $250,000 or more. You'd get a break between $106,800 and $249,999, but after that, the tax would kick back in.

That proposal is not currently on the legislative agenda. As the retirement crisis worsens, it should be.

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