NCPA - National Center for Policy Analysis


March 18, 2005

Some advocates of private accounts, namely the White House, say that they would consider raising the cap on wages subject to the payroll tax above $90,000 to pass Social Security reform.

But Donald Luskin (National Review) says the tradeoff is not worth it. For example, suppose the cap was moved to $150,000; consider its effect on a worker who earns $120,000 annually:

  • Over 20 years, this worker would likely pay more in taxes than they would gain in added returns on their retirement contributions through private accounts.
  • To break-even, the real returns on investment in their private account would need to reach 13.5 percent, well above the average annual return of 7.2 percent.

Moreover, Luskin suggests that taxing those earning more than $90,000 will hit small businesses, stunting job growth.

Ultimately, there is no need to raise taxes because there are no transition costs, says Luskin, because the cost of diverting payroll-tax dollars into personal accounts today is perfectly offset by reduced benefit payments that will have to be made in the future.

Source: Donald Luskin, "The Harebrained Cap-Raising Idea," National Review Online, March 1, 2005.


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