Wednesday, July 29, 2009

New paper: Distributional Effects of Raising the Social Security Taxable Maximum

My old co-worker at SSA's Office of Policy, Kevin Whitman, has an interesting new paper out looking at how increases in the Social Security "tax max" – currently $106,800 – would change the system's progressivity. He runs through a variety of measures and a number of different ways of lifting the cap. Here's the summary:

As of 2009, Social Security's Old-Age, Survivors, and Disability Insurance program limits the amount of annual earnings subject to taxation at $106,800, and this value generally increases annually based on changes in the national average wage index. This brief uses Modeling Income in the Near Term (MINT) projections to compare the distributional effects of four options for raising the maximum taxable earnings amount beyond its scheduled levels. Two of the options would raise this value so that it covers 90 percent of all covered earnings and two would remove the maximum completely. Within each set of options, the proposals are differentiated by whether the new taxable amounts are used in computing benefits. Most workers would not be affected by these proposals, but some higher earners would experience a substantial increase in taxes. Correspondingly, benefit increases are largely isolated to higher earners, although the return in benefits for taxes paid would also decline. Because the proposals are targeted toward high earners, Social Security's progressivity would increase.

Well worth checking out – read it here.

Hat tip to Bruce Webb at Angry Bear for pointing this out.

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