NCPA - National Center for Policy Analysis

Increasing Social Security Taxes Won't Make the Program Solvent

March 23, 2004

One way to address Social Security's looming insolvency is to integrate a private investment component into the current system, allowing younger workers to fund part of their own future benefits by investing some of their Social Security taxes today. Another way is to increase taxes; raising or eliminating the Social Security payroll tax cap is frequently suggested.

The wage cap is the maximum earnings to which the 12.4 percent Social Security payroll tax applies. It is currently $87,900, and automatically rises with inflation. According to a new Social Security Administration report, removing the payroll tax cap would:

  • Push back the date of Social Security's cash-flow deficit from 2018 until 2025 --giving Social Security only seven additional years of surpluses. [See the figure.]
  • Increase the Treasury bonds deposited in the Trust Fund by $3 trillion, up to $7 trillion at its peak.
  • Increase Social Security's income by $14 trillion over the next 75 years, reducing Social Security's 75-year debt from $27 trillion to near $14 trillion, but still leaving a significant debt.

Eliminating the payroll tax cap immediately affects 9.2 million Americans, raising their marginal tax rate by 12.4 percent. As a result, earners in the top income tax bracket would pay more than half of each additional dollar they earn in taxes.

NCPA studies show that the current system encourages people to work fewer hours and produce fewer goods and services, imposing an economic cost of 11 cents to 18 cents for every dollar of tax revenue collected. According to the Heritage Foundation's Center for Data Analysis, eliminating the cap would raise taxes $461 billion over the first five years, and over 10 years cost more than 1.1 million new jobs.

Finally, any excess cash collected will be spent on other government programs, as it always has been. However, personal retirement accounts could ensure the new funds are saved for retirement.

Source: Matt Moore, "Eliminating the Social Security Payroll Tax Cap: A Bad Idea," Brief Analysis No. 470, March 23, 2004, National Center for Policy Analysis.

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