NCPA - National Center for Policy Analysis

Raising Social Security Payroll Tax Cap Not the Answer

April 15, 2011

If one surveys left-of-center commentators about how to solve Social Security's financing shortfall, one suggestion is heard more frequently than all others: increase the amount of worker wages subject to the Social Security payroll tax.  However, raising the cap on taxable wages does not come close to fixing Social Security's financing shortfall, says Charles Blahous, a research fellow with the Hoover Institution.

  • The more wages that Social Security taxes, the more it owes in benefits.
  • This means that raising the cap on taxable wages would be very inefficient; it would actually result in additional benefit outlays, paid to those who need them least.
  • Even if the cap on taxable wages were entirely eliminated -- that is, a new 12.4 percent payroll tax were applied on all wages from $106,800 to infinity -- most of the annual shortfalls (62 percent of them over the long term) would still remain.
  • About one-fifth of workers would be affected by an increase in the cap.
  • Raising the cap fails the equity test in that it would not actually hit those individuals who benefited from an increase in income inequality since 1983.

Serious discussion of raising the cap needs to recognize the substantial policy problems associated with the idea and most especially as a provision offered in isolation.  It would adversely affect a substantial number of workers and it would not at all address the equity issues usually invoked in its support, says Blahous.

Source: Charles Blahous, "Why Raising Social Security's Tax Cap Wouldn't Eliminate Its Shortfall," Economics 21, April 12, 2011.

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