Wednesday, February 18, 2015

New paper: “Who Would Pay More if the Social Security Payroll Tax Cap Were Raised or Scrapped?”

The Center for Economic and Policy Research released,
“Who Would Pay More if the Social Security Payroll Tax Cap Were Raised or Scrapped?” by Nicole Woo, Cherrie Bucknor, and John Schmitt
On January 1st, the maximum amount of annual earnings subject to the Social Security tax – a.k.a. the payroll tax cap – increased to $118,500. Every year, this cap is adjusted to keep up with inflation. However, many American workers are not aware that any wages above the cap are not taxed by Social Security.

This issue brief analyzes Census Bureau data to determine how many workers would be affected if the Social Security payroll tax cap were raised or phased out. We find that the richest 6.1 percent of workers (less than 1 in 15) would pay more if the cap were scrapped. Only the top 1.5 percent (1 in 67) and 0.7 percent (1 in 140) would be affected if the tax were applied to earnings over $250,000 and $400,000, respectively.

When we look at the wage earners according to gender, race or ethnicity, age, or state of residence, the share of workers who would be affected by increasing or phasing out the cap varies widely.

You can check out the whole paper here.

Editor’s note: the percentage of individuals who earn above the payroll tax ceiling in any given year is quite small, but it is not the same people every year. Over a working lifetime, I believe that around 22% of individuals would pay higher higher taxes if the “tax max” were lifted.


WilliamLarsen said...

...“Who Would Pay More if the Social Security Payroll Tax Cap Were Raised or Scrapped?”

When social security was first conceptualized the thought belief was that it should be supported by those who benefit from it. It was for those with steady income, not those in the highest paid categories (doctors, lawyers) or those with pensions (government, military) and excluded unsteady work with low wags (farmers, hotel workers, cooks, waiters, etc). SS-OASI was to provide a safety net that would cover half the work force. To maintain support for this program funding was to limited to those it was to cover and paid for by a tax on those covered workers. The tax should be fair and equitable so as not to pit workers against each other. It should have broad support and to achieve this a cap was placed on wages subjected to the OASI tax.

This cap limited the contributions of any one worker. The OASI calculation has always been to benefit low wage workers over higher paid workers. The 1977 benefit formula actually shows this very well. Two bend points, much like income tax brackets, split a workers average indexed wage into three categories at which these three categories of indexed wage are replaced at 90%, 32% and 15%. Clearly these replacement rates show clearly how progressive the benefits are while the OASI tax is flat, still creating a very progressive benefit.

Now that the payroll tax has far exceeded the actuarial cost of the even the low wage earner, there is no support to raise the OASI tax higher. This leaves SS-OASI in a pickle.

Politicians can garnish no support for raising the payroll tax.

Politicians may gain support for raising the retirement age, but then they risk making SS more of a lottery - If I live long enough I may be a winner and collect; how lucky am I?

Politicians standing by and letting nature takes it course will see initial OASI benefits decrease by 25% and then steadily more each year until it is 40%. Clearly this is not a pretty picture.

The only thing left is to find the smallest group of people and put them on the stake. Oh, it will only affect a few and they can afford it. This will be a short term fix only adding a few positive years to the 75 year solvency evaluation period, but nothing towards the life of SS.

When those few are no longer enough, they will come after the next rung on the ladder. Is that you, your kids or grand kids?

SS is a ponzi scheme. The only thing different from Maddof is that Maddoff could not change the rules.

JoeTheEconomist said...

Bill, Do you doubt the NASI's survey that says 84% of Americans are willing to pay higher payroll taxes?

WilliamLarsen said...


I have done surveys of workers since the mid 80's. In 1990 I found that workers who were under age 45 90% of the time voted to repeal Social Security out right. Maybe they bad taste the the 1983 Big fix or kick the can down the road was the issue.

When I ran for congress I found the young college students favored 95% of the time to repeal the program.

I have been called many times to answer SS surveys and not one every offered to eliminate or repeal the SS Act. At best the only answer available to answer were "slight cuts in benefits."

I would believe that a good 90% of those under 45 would vote and support Repealing the SS Act.