An Argument for Uncapping the Maximum Taxable Earnings - peoplespolicyproject.org
Social Security’s looming solvency problem is, as expected, creating a groundswell of attention publicly these days, as well as an increasing focus in the 118th Congress. As a result of this heightened interest, we’re seeing a growing number of articles and proposals about what needs to be considered to head off what is projected to be–absent legislative attention–a catastrophe for Social Security beneficiaries in less than a decade.
One of the more persistent questions arising from discussions about reforming and modernizing Social Security is the issue of the program’s cap on taxable earnings, presently set at $160,200 for 2023. Many viewpoints suggest that simply removing this limit on the taxation of payroll would go a long way toward ensuring long-term solvency, while others cite the opinion that it would only represent a partial solution while moving Social Security further away from an earned benefit program to a more progressive, almost welfare-like, system.
As the solvency issue develops, it’s likely that we’ll see more opinion pieces appearing in the media on whether extend the tax cap or eliminate it entirely, and today we’re including here a discussion on how the U.S. tax system compares to other countries. This post, by blogger and policy analyst Matt Bruenig appearing on peoplespolicyproject.org (read it here), provides a glimpse at how the U.S. stacks up against Organisation for Economic Co-operation and Development (OECD) countries, and discusses the impact of removing the cap on disposable incomes.
The issue of adjusting the tax cap will doubtless be an ongoing source of debate as Social Security reform is discussed in the months ahead, so you’ll likely see pro and con positions expressed in the media frequently. The Congressional Budget Office (CBO), for example, periodically weighs in on the matter with analyses of the budgetary and economic implications of major issues like this (see the CBO compendium of policy options document here). Here’s a sampling of the CBO’s research on the tax cap issue:
“The Social Security program, on net, is progressive—that is, the benefits received from the program, measured relative to taxes paid into the program over the beneficiary’s lifetime, tend to be higher for lower-income households than for higher-income households. When considered in isolation, Social Security taxes are regressive—that is, people with higher earnings, in particular those with earnings above the taxable maximum, pay a smaller percentage of their total earnings in Social Security payroll taxes than those with lower earnings. The regressivity of Social Security taxes is counterbalanced by the progressivity of Social Security benefits. Specifically, people with lower earnings during their lifetime tend to receive a larger share of their earnings in benefits over their lifetime. Two factors contribute to the progressivity of benefits: First, the benefit formula replaces a larger share of earnings for people with lower lifetime earnings; and, second, people with lower lifetime earnings are more likely than average to receive disability benefits. Those factors are partially offset by the fact that people with higher lifetime earnings tend to live longer than average, which means that they collect retired-worker benefits for more years.”