Why Taxing All Wages Won’t Save Social Security

Removing the $117,000 cap on Social Security payroll taxes has been discussed lately as a way of eliminating the shortfall in the program’s funding.  Currently, any income over the cap is not taxed toward Social Security, which means that many high-income earners are not contributing past their initial $117,000.  An interesting Washington Wire blog by Maya MacGuineas points out that raising the cap will only serve to alleviate the shortfall, but won’t cure it.  A few exerpts:

Even if we eliminate the cap–and there is a good case for at least raising it–that wouldn’t make Social Security even close to solvent.According to the Social Security Administration (SSA), eliminating the cap would close about 70% of the system’s 75-year imbalance. According to Congressional Budget Office accounting, it would close only 45% of the gap.

Part of the reason the change would not be more effective is that while Social Security might begin taking in more revenue, it would also be on the hook for paying out larger benefits down the road. One smart way to address this would be a form of means-testing, where there would be no additional benefits associated with the additional contributions from those making more than $117,000. This would generate more revenue for Social Security while better targeting its benefits.

I wouldn’t trust any projections from the Social Security Administration on the finances of the program, so don’t count on the gap closing up by 70%.   MacGuineas correctly points out that introducing means testing could help further reduce the shortfall, but eliminating the cap simply won’t be enough.

 

-RR

 

 

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