More Thoughts on the Taxable Maximum and its Role in the Solvency Problem - The Peter G. Peterson Foundation

Through the years, the issue of raising–or eliminating–the maximum amount of earnings subject to the Social Security payroll tax, the 12.4% assessment levied on payroll income up to the limit set each year, has repeatedly surfaced as a solution to the program’s looming solvency problem. Typically referred to as the “tax cap”, the current limit is set at $160,200, up from $147,000 last year as the result of last year’s increase in the national average wage index. So, as the likelihood of focused attention on the solvency issue increases in the 118th Congress, it’s no surprise to see frequent discussion pieces emerging on this very topic.

In a post on pgpf.org, the staff at the Peter G. Peterson Foundation weighs in on the taxable maximum issue with a statistical analysis of the pros and cons associated with the basic question of what to do about the tax cap. The Peterson article notes that while the payroll tax is characterized as a regressive tax, the overall design of the Social Security program is progressive, as is the federal income tax system, with the tax cap cited as a factor in causing the contradiction. The article goes on to present several potential changes to the payroll tax structure, for example re-applying the tax when income reaches a higher level, changing it to a proportional tax, or eliminating it altogether.

Logically, there are pros and cons to any approach suggested, and these too are outlined in the Peterson article. Among the pros are naturally the increased revenue coming into Social Security, along with the potential impact on income inequality. The cons, on the other hand, include a fundamental change in linkage between lifetime earnings and eventual benefits, as well as the fact that high earners–those earning beyond the cap, are already subject to a larger portion of their benefit being subject to federal income tax,

Read the Peterson post here. A vexing issue, for sure, and one that will no doubt be a consideration in any Social Security discussions in the coming months. In the midst of the discourse, the Association of Mature American Citizens’ (AMAC) Social Security Guarantee is expected to be a factor in achieving forward motion. The AMAC plan is based on the premise that preservation and moderization of Social Security can be achieved with no tax increases, taking selected portions of bills introduced by former Rep. Sam Johnson (R-TX) and current Rep. John Larson (D-CT) and merging them with the Association’s own research. Read AMAC’s plan here.

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