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This proposal,

Income above that level is exempt from

Introduction

Social Security taxes (though not Medicare

which would cre-

payroll taxes).5 Approximately 84 percent of

ate the largest tax

all wage income earned in the United States

Some opponents of allowing younger

increase in U.S.

falls under that cap and is subject to the tax.

workers to privately invest a portion of their

Advocates of raising or eliminating the cap

Social Security taxes through individual

history, would

on payroll taxes often suggest that the current

accounts have suggested that most or all of

do very little to

level of covered wages is significantly below

Social Security's financial problems can be

the rate of roughly 90 percent of covered earn-

solved if the current cap on income subject to

improve Social

ings subject to the tax in 1983, at the time of

the Social Security payroll tax is raised or

Security's

the Greenspan Commission's reform. What

removed altogether. Indeed, public opinion

finances.

they fail to note, however, is that the 1983 rate

polls show widespread public support for the

idea.1 Even President Bush appears open to

was unnaturally high. In fact, as Figure 1

shows, from 1945 to 1965 the proportion of

the idea, although only in the context of larg-

wages covered by the payroll tax declined

er reforms that would also include the cre-

ation of personal accounts.2 However, a clos-

steadily, from 88 percent to roughly 71 per-

cent. However, beginning in 1965, as the cap

er look shows that this proposal, which

was gradually increased, it reached a high of 90

would create the largest tax increase in U.S.

percent in 1983. Since that time, it has again

history, would actually do very little to

begun to decline but remains above the

improve Social Security's finances.

post­World War II average of 82.9 percent.6

When Franklin Roosevelt first proposed

Social Security in 1935, there was no explicit

For advocates of changing the cap, there are

cap on the wages subject to the tax. However,

two main policy questions. First, should the cap

because the law was primarily designed to pro-

be removed altogether or simply raised?

vide retirement benefits for low-income work-

Although some groups, such as the Economic

ers, nonmanual laborers with incomes of

Policy Institute, the 2030 Center, and the

more than $3,000 were exempted from the

National Council of Women's Organizations,

program. The final legislation, however, in an

have suggested the cap should be completely

attempt to make the program more universal,

eliminated, most have argued in favor of

eliminated the exemption for nonmanual

increasing it, generally to a level that would

cover 90 percent of wage payroll.7 That would

laborers, while formally capping taxable wages

at $3,000.3

be approximately $150,000 today.

Second, should the increased taxes count

That $3,000 cap remained in place until

toward increased benefits? Today, workers

1951 when Congress, faced with a need for

theoretically earn some benefits in return for

additional Social Security revenue, increased

every dollar paid into the system.8 Therefore,

it for the first time to $3,600. Between then

and 1974, Congress voted seven more times

raising or eliminating the cap to subject more

to raise the cap, until it reached $13,200 in

wages to taxation would, under current for-

1974. At that point, Congress established an

mulas, mean that the worker would receive

automatic mechanism to increase the cap

more benefits. It would not be a dollar-for-dol-

annually by a percentage equal to the growth

lar increase, because Social Security's progres-

in average wages. Congress overrode those

sive benefit formula provides workers with

automatic provisions in 1977 to increase the

only 15 cents on the dollar for taxes paid on

wage base above the scheduled level for the

wages above $3,779 per month. Still, the pro-

years 1979­81. Thereafter, the increase in the

vision of increased benefits in exchange for

wage cap returned to the automatic formula

increased taxes would somewhat reduce the

established in 1974 (Table 1).4

revenue gains and could ultimately result in

Social Security paying Bill Gates millions of

Currently, workers pay Social Security

dollars in retirement income.

taxes on the first $90,000 of wage income.

2