Increasing The Cap

AKA Increasing The Tax Max
Summary

Payroll taxes are paid on wages up to a maximum level set each year. In 2015, this maximum is $118,500.   This cap sets the maximum amount of each worker’s earnings that is subject to the payroll tax. 

Get The Facts 

You will frequently read on the net that all we have to do is raise the cap, and the problem goes away - this is completely false.  

Here is the SSA's Chief Actuary's response to Bernie Sanders legislation which would increase the cap.  This is important because over three years the projection for increased solvency has dropped from 75 to less than 50.

CBO projects that eliminating the cap will solve less than 50% of the short-term shortfall.  SSA says that it is closer to 60%.    

Our Doubts

Most of the estimates that we have seen fail to incorporate the behavioral response to higher taxes.  The basic assumption is people will not avoid the higher taxes.   

Chasing contributors out of the system is not a solution.

First, this solution is a tax increase on the high income workers. We do not believe that the tax will be very effective. This group already subsidizes Social Security. Workers in this category get back substantially less than they contribute. The lower the return goes, the more we will see this group avoid the system entirely. They will take pay in stock options and other benefits which are not part of the payroll tax formula. They will work less - and retire earlier. 

Fewer jobs is not the solution for Social Security

Second, it will raise the cost of labor in the United States. While this tax will affect a minority of workers, those workers generally manage larger numbers of people. As business shifts production away from the high cost producer we will lose all of the jobs not just those where the tax was applied. If you discount this problem, understand that the Congressional Budget Office estimated that lowering FICA taxes from 12.4% to 10.4% will create as many as 7 million jobs. So the labor markets are fairly responsive to labor taxes.

Never Lose Focus On The National Debt

Third, future generations will ask why we raised taxes to support our own retirement system, but didn't raise taxes to control the deficit. Future generations are the ones who will be expected to pay the payroll taxes needed to keep Social Security afloat. If we raise taxes to support Social Security, while putting the excesses of our government on the kids credit card, we should expect an unpleasant end for Social Security when the kids get the right to vote.

Other Resources

Social Security Administation; "The Evolution of Social Security's Taxable Maximum"
Congressional Research Service; "Social Security: Raising or Eliminating the Taxable Earnings Base"
New York Times; "Should Social Security Taxes Affect All Wages?"