Advancing a Free Society

Why Raising Social Security’s Tax Cap Wouldn’t Eliminate Its Shortfall

Tuesday, April 12, 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. The rationale is usually presented much like this:

  1. Social Security taxes are currently only applied to the first $106,800 (indexed) of wages. This cap is said to shield high-wage workers, and thus to be regressive and unfair.
  2. The current cap was set in 1983 to expose 90% of total national wages to the Social Security tax. Because of inequality in income growth since then (the rich growing richer), the amount of wages escaping such taxation has grown from 10% to about 15%. It is said that if we raise the tax, we will return to historical intent and also address the erosion of income equality since 1983.
  3. If we raise the cap on taxable wages, it is said, we would only affect a very small number of workers, the very richest Americans.
  4. If we raise the cap on taxable wages, it is said, we will make significant headway in reducing the Social Security shortfall.

All of the statements above are at the worst untrue, and at the very best so imprecise as to be misleading. The purpose of this piece is to clear up some of these points of common confusion, and to explain why raising the cap on Social Security taxable wages would actually leave most of the program’s financing shortfall in place.

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