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Changing the Payroll Tax Rate to Address Social Security’s Shortfall - The Motley Fool
How Much of an Increase would it take?
As various organizations weigh in with specific suggestions to fix Social Security’s looming financial train wreck, we often see proposals to raise the payroll tax rate to bolster the revenue side of the equation. This may seem like a simple solution, but after careful examination, it becomes clear that it’s really not that simple. Beyond the pain inflicted directly on those paying the tax, changes to payroll tax rates–6.2% for employers and 6.2% for employees–could have a chilling effect on payroll growth, as the additional tax burden might inhibit wage growth and, in turn, overall workforce tax contributions. A higher FICA rate would also disproportionately impact lower-wage earners, since the increased burden would represent a larger share of their overall earnings. Further, additional payroll costs would likely impact hiring, especially for small businesses. Overall, this option is considered by many to be the least politically viable.
Objections aside, many wonder exactly what size increase would be necessary to make the payroll tax increase financially effective. The Motley Fool’s Kailey Hagen, CFP, in a post on their website, suggests that a rate north of 16% would be needed, and she explains this conclusion further in this post.