KEEP THE CAP
August 17, 2005
Raising or removing the current cap on income subject to the Social Security payroll tax is a bad idea, says the Cato Institute's Michael Tanner.
Public opinion polls show widespread support and President Bush appears open to the idea -- but only in the context of larger reforms that would also include the creation of personal accounts. However, the removal of the cap would have serious repercussions, says Tanner:
- It would create the largest tax increase in U.S. history: $1.3 trillion over the first 10 years.
- Increasing the cap to 90 percent of covered wages (around $150,000 per year) would extend the date by which Social Security begins to run a deficit by just three years.
- It would have an insignificant effect on the program's long term unfunded obligations and would amount to $384 billion in new taxes.
- It would give the United States one of the highest marginal tax rates in the industrialized world, and potentially could severely disrupt economic growth.
Yet, in exchange for this massive tax increase, Social Security would gain only an additional seven years of cash-flow solvency -- that is, until the trust fund is exhausted and additional general revenues are needed to pay benefits. But it would not address Social Security's other problems, says Tanner:
- It would not give workers ownership and control over their money, nor would it allow low- and middle-income workers to accumulate a nest egg of real, inheritable wealth.
- Nor would it improve Social Security's rate-of-return for younger workers.
In the end, proposals to change the taxable wage cap are all pain and no gain; and since there is a viable alternative -- creating personal accounts -- Congress should not go down this road, warns Tanner.
Source: Michael Tanner, "Keep the Cap: Why a Tax Increase Will Not Save Social Security," Cato Institute: Briefing Papers, no. 93, June 8, 2005.
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