Debt Digest | Deficit Day: Social Security Tax Cap Debate Intensifies as Reform Options Face Scrutiny
Washington D.C. – A core proposal to address Social Security’s looming financial challenges – eliminating the payroll tax cap – is drawing sharp criticism from economists who argue it represents a ample tax increase with limited long-term impact. As policymakers grapple with the program’s solvency,debate centers on whether raising or removing the cap on earnings subject to Social Security taxes is a viable solution,or if option reforms are needed.
The debate comes as Social Security faces a projected shortfall, with the latest estimates indicating the combined trust funds could be depleted as early as 2034. Addressing this requires arduous choices, and the idea of eliminating the $176,100 cap on taxable earnings has gained traction among some progressives. However,analysis from the American Enterprise institute and the Cato Institute suggests this approach is both economically significant for high earners and ultimately insufficient to solve the long-term problem.
Andrew Biggs of the American Enterprise Institute critiques the proposal, stating it would “effectively increase the top tax rate by 12 percentage points.” He explains the impact on individuals: “Eliminate the social security tax max and your tax rate increases directly by 6.2 percent, the employee share of the Social Security tax.But on top of that, both the Social Security Management and the Congressional Budget Office assume that your employer will offset thier own higher payroll taxes dollar-for-dollar against your salary. So your pay falls by another 6 percent or so.”
Further analysis by Boccia and Nachkebia at the Cato Institute reveals that even with the cap removed, the solution offers only a temporary reprieve. Their research indicates that eliminating the payroll tax cap “creates only about five years’ worth of surpluses before returning to deficits by 2029-surpluses that would most likely be spent on other government programs anyway.” They advocate for exploring alternative reform options detailed in their new book,Reimagining Social Security: Global Lessons for Retirement Policy Changes.
