Should the Cap on Social Security Payroll Taxes Be Lifted?

Should Higher-Income Employees Pay More?

Should the Cap on Social Security Payroll Taxes Be Lifted?
September 17, 2015

The Social Security system has served to keep many elderly Americans out of poverty since its inception in 1935. It faces a looming funding crisis as the large Baby Boomer generation begins to retire. Our expanded life spans mean that fewer workers are supporting more retirees for a longer time.

The Social Security Trustees Report shows that the system is funded through 2035, at which time benefits will need to be cut by around 25% unless action is taken. The Disability Insurance component (DI), around 18% of Social Security spending, is projected to have its trust fund depleted as early as 2017. How do we handle the shortfall?

Many proposed solutions involve the benefits side by trimming benefits in some fashion. Pushing back the Full Retirement Age is one path that has been used before. Others suggest means testing for benefits based on income, crackdowns on system fraud, and other spending cuts. Of course, increasing income could also solve the problem.

Raising the Social Security tax rate across the board is probably a non-starter, but Social Security taxes as collected now are very different from income taxes: they are not progressive, and they have a cap on upper income.

Your Social Security payroll tax is split into two components, the Old Age, Survivors and Disability Insurance (OASDI) component that covers what most people think of as Social Security, and the Health Insurance (HI) component that funds Medicare. The combined rate for both taxes is 7.65% for 2015, with 6.2% of that as OASDI and 1.45% as HI. (If you are self-employed, double that because you will also pay an employer's share).

However, the HI rate applies to all taxable income, while the Social Security tax applies to taxable income up to a cap level ($118,500 in 2015). The cap is adjusted slightly based on an average wage index formula.

Thus, not only are Social Security payroll taxes not scaled as income increases, they stop completely beyond a given level, making them quite regressive. Very high wage earners pay far less of their income in payroll taxes than lower wage earners do.

The Center for Economic and Policy Research notes that in 1983, the cap was set to cover 90% of all taxable wages. At the time, it was assumed that automatic cap adjustments would keep Social Security covering that same 90%. However, increased income inequality since that time means that the cap only covers around 84% of the available taxable wages. In 2014, raising the income cap to $180,000 would have restored the 90% mark and logically filled the income shortfall.

Not so fast, says the Heritage Foundation. They argue that raising payroll taxes would dramatically raise the marginal tax rate on the upper-middle class as well as the wealthy. For example, a married dual-earning couple bringing home $250,000 would have their marginal tax rate raised from 36.8% to almost 50% (citing a proposal at the time to increase the cap to $240,000). Ill effects would show up as smaller savings, lesser investment, and lower spending, creating an economic slowdown.

The Heritage Foundation makes another interesting point — all studies assume that more money means that no new benefit programs would be created (questionable) and that the funds would not simply be used to borrow against for greater Congressional spending (highly unlikely). As it is, we must borrow to repay the IOU's Congress has left in the trust fund.

Ultimately, whether you think the cap should be raised or abandoned depends on how you feel about progressive or regressive taxation — and most likely, how much money you make. Our biggest concern is how to keep the extra revenues from being absorbed and lost in an administrative shell game of increased spending that puts us right back in the same shortfall mess in the future.

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Sarah | 09.17.15 @ 14:28
It's a sticky situation no matter the decision made with the inevitable pros and cons on both sides.
trish | 09.17.15 @ 14:29
My parents are both 80 and are living on social security...barely. They retired at 68, yet both went back to work to try to make ends meet. They both retired again in their late 70s. It pains me to see them go to the doctor less, or struggle to make ends meet...when they worked so hard all of their lives thinking they were ready for retirement. Such a sad state of affairs.
Kate | 09.17.15 @ 14:29
I don't know exactly how to correct the system, nor do I believe there will be a system in place when I qualify for it. I think it is sad actually how bankrupt our country has become.
Elaine | 09.17.15 @ 14:30
I'm sure there are pros and cons to both options.
Daniel | 09.17.15 @ 14:32
SS is always a hot topic issue. Arguments will keep going for years on how to properly handle it
Steffanie | 09.17.15 @ 14:33
Such a tough decision to make
Tina | 09.17.15 @ 14:36
The systems is definitely broken though I won't pretend to have the answers. I just know it's rough giving up that much money each month knowing I'll likely never see the benefit from it.
Carla | 09.17.15 @ 14:37
All this money we are sending to other countries should be redirected to take care of our seniors here. Growing old should be a time of enjoyment not stress over whether or not you will get what you earned over your entire life.
Britt | 09.17.15 @ 14:40
It really is one of those awkward situations either way it goes.
STOKES | 09.17.15 @ 14:40
The Social Security system is broken. I certainly don't trust it. I personally privatize my own retirement plan.
Kailie | 09.17.15 @ 14:41
This is actually really interesting.
Kyle | 09.17.15 @ 14:45
This is a really great piece of information.
Morgan | 09.17.15 @ 14:47
My grandfather just recently retired this year in his late 60s, and things like this always really worry me.
Katie Greene | 09.17.15 @ 14:48
Good information. My mother is on SS and it's scary how up and down it is in the news. Never know month to month what will happen.
Chrisitna | 09.17.15 @ 14:57
I think cracking down on system fraud and basing benefits on income is the way to go.
Nancy | 09.17.15 @ 14:57
The last sentence in the second to last paragraph is telling. It begs the question how much trouble goodbye Social Security system be in if Congress simly paid back what it has borrowed?
Heather | 09.17.15 @ 14:58
The age limit should not increase. Because if that happens there will come a time when no one will ever reach that age. Also social security should not be touched for anything other than what it's intended for.
irene | 09.17.15 @ 15:12
I think many of us have given up hope that social security will even be there for us when we reach that age, they have already raised the retirement age considerably seemingly in hopes that people who live long enough to collect what they are owed will not live long enough to collect more than a few years.
gracie | 09.17.15 @ 15:18
I am not sure what the answer to our SSI program is? In many cases it is just barely covering expenses and in some cases not even that. If a reasonable change does not come around soon I doubt it will be there once I am at the age to use it.
Ron | 09.17.15 @ 15:19
Tax equally and fairly. 10% means 10%, not 10% on up to some number detetrmined number.
Jackie | 09.17.15 @ 15:32
This subject comes up every time there's a presidential election and there is never a decision made. It will no doubt go until the SS fund is empty.
Christina | 09.17.15 @ 15:35
The elderly people don't have enough to live on now. I hope it gets turned around soon.
Kamie | 09.17.15 @ 15:39
Not a topic I like to get into. I know when I retire I will be fine.
George | 09.17.15 @ 15:40
It's sad you work all your life to pay in so you can suffer even more when you cannot work.
Kathryn | 09.17.15 @ 15:50
I honestly see people barely getting by with their social security.. It's awful how we can use our tax dollars to fund abortion but can't use it to help the hard working Americans.
Jonathan | 09.17.15 @ 15:54
The SSA really needs a good overhaul, it can still be useful in the future, but it will not be there in the same capacity.
Angie | 09.17.15 @ 15:58
It used to be common thinking that social security would be enough to get one through ones' golden years - no longer. The younger generations must aggressively prepare for retirement if they want to live without serious struggle - saving and investing are going to be even more important for them. Honestly, I don't see myself as being able to retire - that's an optimistic view that good health will be long lasting...
Clarissa | 09.17.15 @ 16:19
I see pros and cons on both sides. Although I think it may be time for an updated system, I'm not sure how it would be updated.
Alec | 09.17.15 @ 16:23
We shouldn't punish our elders for working their whole lives by making them work well beyond when they're able. My opinion is that there's not enough money going in to the system because so many jobs have been replaced by overseas factories or robots. However, this article did mention the baby boomer population retiring. There are a lot more people in that age range now than there were in the generations before and after it and that wasn't taken in to consideration.
Zanna | 09.17.15 @ 16:34
The amounts being taken aren't the issue, the budgeting and the administration of the funds are both putting the entire system at risk.
Angie Taylor
Insurance Agent in Montevallo, AL | 09.17.15 @ 16:42
Its really sad that we can spend millions on foreign aid but we can't take care of the retired.
Rindy | 09.17.15 @ 16:59
It is truly a mess. Gone are the days when you had a pension to supplement SS Income. My dad had that and he lived very comfortably after retirement but I know that will not be the case for me. I think companies need to start giving retirement pensions again.
Selena | 09.17.15 @ 17:00
I say lift the cap. Why is it we let people make an insane amount of money, that they could not possibly hope to use in their entire life, without expecting them to pay into the country that gave them the ability to make so much money. 10% of a million dollars might sound like a lot, but compared to the 90% you keep, it really isn't that much to ask for.
Erin | 09.17.15 @ 17:03
Yes, I think the cap should be lifted.
$commenter.renderDisplayableName() | 11.27.20 @ 07:54