Research Desk responds:

 Could raising the income cap save Social Security?

By Dylan Matthews

jpeg asks:

Back during the GWB years and the push to privatize Social Security, I did a bit of a thought experiment. What if Social Security was changed so companies no longer had to contribute their portion of Social Security, but Social Security was collected on all individual income with no cap? From what I found, it seemed like this would easily solve any "problem" with the funding of Social Security. Finding data for this was difficult and I wasn't sure of the veracity of some of the data so I kind of chalked it up to "too good to be true" and forgot about it.

Let's put jpeg's specific proposal to one side and first look at the general question of how raising the payroll tax cap could affect Social Security's finances. Currently, wages over a certain yearly total ($106,800 this year) are exempted from Social Security payroll taxes. Medicare's payroll tax has no such cap. This has raised the question of how raising the cap could extend Social Security's solvency. Janemarie Mulvey and Debra Whitman of the Congressional Research Servicelooked at this question in 2008 by evaluating three different proposals. The first would raise the cap so that 90 percent of wages are taxed (CRS estimates this would mean a cap of $171,600 in 2006) and pay higher benefits to those affected; the second would eliminate the cap and pay higher benefits; and the third would eliminate the cap for taxes but would not increase benefits. Here is how the proposals would affect the actuarial state of Social Security, as compared to its current trajectory:

Alternately, here's how much of the Social Security shortfall is eliminated by each proposal:

While all proposals put a dent in the shortfall, completely eliminating the cap without increasing benefits actually creates a long-term surplus, and eliminating the cap while increasing benefits comes close. The nature of Social Security as a social insurance, rather than welfare, program suggests that the latter proposal may be more palatable, as it retains the connection between what wage-earners pay into Social Security and what they get out of it.

Now, jpeg's proposal to eliminate the business-side tax would amount to slashing the Social Security tax in half. The CRS estimates that almost $100 billion in annual revenue would result from eliminating the cap, but that doesn't come close to half of the $654 billion (PDF) in revenue Social Security taxes brought in for 2009. To be sure, such a drastic cut could have a stimulative effect, and it's very possible that it would result in less than a 50 percent reduction in revenues, but it seems unlikely that the revenue loss would be smaller than $100 billion. Some cut in rates may be in order if the tax's cap is raised or eliminated, but one this drastic would probably go too far.

By Ezra Klein  |  June 28, 2010; 2:48 PM ET