NCPA - National Center for Policy Analysis

Heritage Foundation: Removing The Payroll Tax Cap Won't Help

January 15, 2002

By 2016 Social Security will spend more than it collects and it will rack up a higher debt with each passing year. Some have suggested removing the Social Security tax cap on wages as a way to reduce the deficit.

The retirement portion of Social Security is financed by a 10.6 percent payroll tax that is levied on wages up to a maximum -- or cap -- of $80,400 in 2001. The cap increases each year with wage growth. Removing the cap, a recent Heritage Foundation report points out, would do more harm than good.

  • Removing the cap would not eliminate the program's deficits: the system's insolvency date would only be delayed seven years to 2024.
  • Even without a cap, by 2035 Social Security would only raise enough money each year to pay 87 percent of promised retirement benefits.
  • It would raise taxes $505 billion over five years and $1.2 trillion over 10 years -- the largest tax increase in U.S. history:.
  • The top marginal tax rate would be almost 52.5 percent, the highest level since the 1970s.

Furthermore, the tax increase would have adversely affect the economy, say analysts.

  • In the first year alone, the take-home pay of 10.4 million workers would be reduced an average of $4,907.
  • The weaker economy would produce fewer job opportunities and generate less savings -- in fiscal year 2011, job opportunities there would be 1.1 million fewer job opportunities and the loss in real personal savings would be $39.5 billion.

The cap on taxable earnings has existed since Social Security's creation in 1937. The wage cap reflects the original intent of Social Security that the program be a pay-related "safety net" for retirees and that benefits be linked to taxes paid while in the workforce.

Source: D. Mark Wilson, "Removing Social Security's Tax Cap on Wages Would Do More Harm Than Good," CDA Report No. 01-7, October 17, 2001, Heritage Center for Data Analysis, Heritage Foundation, 214 Massachusetts Avenue, N.E., Washington, D.C. 20002, (202) 546-4400.

 

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