News Release

June 8, 2005

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Eliminating the Tax Cap Won't Solve Social Security's Shortfall
Cato expert says removal of the cap would amount to biggest tax hike in U.S. history

WASHINGTON -- Raising or eliminating the cap on the amount of wages subject to the Social Security payroll tax would have serious consequences for both taxpayers and the U.S. economy, according to a study released today by the Cato Institute.

Removing the cap would represent the largest tax hike in U.S. history -- more than $1.3 trillion in the first 10 years alone -- and would do relatively little for Social Security's solvency, argues Michael Tanner, director of Cato's Project on Social Security Choice, in "Keep the Cap: Why a Tax Increase Will Not Save Social Security":

"Even the most drastic and politically unlikely proposal, complete elimination of the cap without allowing any additional credit toward benefits, would gain just eight extra years of cash-flow solvency for the program. More widely discussed proposals, such as increasing the cap to 90 percent of covered wages (around $150,000 per year), would extend the date by which Social Security begins to run a deficit by just three years and would have only an insignificant effect on the program's long-term unfunded obligations."

"Nor would this enormous tax increase deal with Social Security's other problems," Tanner continues. "It would not give workers ownership and control over their money. It would not allow low- and middle-income workers to accumulate a nest egg of real, inheritable wealth. It would not improve Social Security's rate-of-return for younger workers."

Tanner argues that a better alternative would be to allow younger workers to invest privately a portion of their Social Security taxes through personal accounts, which would give them ownership and control over their retirement funds. Although personal accounts would not by themselves solve all of Social Security's financial woes, combined with measures to restrain benefit growth, they can do far more for Social Security's solvency than would eliminating the cap.

"In the end, proposals for changing the taxable wage cap are all pain and no gain. With a viable alternative -- creating personal accounts -- Congress should not go down this road," Tanner says.

Briefing Paper no. 93: http://www.cato.org/pub_display.php?pub_id=3780

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Contact:

Michael Tanner, director of Cato's Project on Social Security Choice, mtanner@cato.org
Holiday Dmitri, senior media relations manager, 202-218-4613, hdmitri@cato.org
Evans Pierre, director of broadcasting, 202-789-5204, epierre@cato.org

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