Briefing Paper No. 93

Keep the Cap: Why a Tax Increase Will Not Save Social Security

Some opponents of allowing younger workers to privately invest a portion of their Social Security taxes through individual accounts have suggested that most or all of Social Security’s financial problems can be solved if the current cap on income subject to the Social Security payroll tax is raised or removed altogether. Indeed, public opinion polls show widespread public support for the idea. Even President Bush appears open to the idea, although only in the context of larger reforms that would also include the creation of personal accounts.

However, removing the cap would create the largest tax increase in U.S. history: $ 1.3 trillion over the first 10 years. Even increasing the cap to cover the first $150,000 of wages would amount to $384 billion in new taxes. It would give the United States one of the highest marginal tax rates in the industrialized world, with the potential for severely disrupting economic growth.

Yet in exchange for this massive tax increase, Social Security would gain only an additional seven years of cash-flow solvency. 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.

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Michael Tanner is director of the Cato Institute Project on Social Security Choice and editor of Social Security and Its Discontents (2004).