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Figure 4

Social Security's Payroll Tax Surplus or Deficit (increase cap to 90 percent of earnings and

credit for benefits)

5

4

3

Current System

2

With Cap Eliminated

1

0

-1

-2

-3

-4

-5

-6

-7

Year

Source: Social Security Administration.

the impact could be larger than assumed by

the end of the 75-year actuarial period, and

SSA's actuaries.24 For instance, Harvard econo-

continuing to grow outside thereafter. Overall,

Social Security's unfunded obligations total

mist Martin Feldstein estimates that this would

$5.7 trillion over the actuarial period and

cut income reported by about 7 percent as a

$12.8 trillion over an infinite horizon.22

result of reduced effort and increased tax avoid-

ance.25

How would changing the tax cap affect the

fiscal balance? Figure 4 shows what would

Eliminating the cap obviously brings in

happen if the tax cap were raised to $150,000,

more revenue than simply raising it, but far

approximately 90 percent of wages, while

less than many believe. As Figure 5 shows, the

allowing workers to continue accruing bene-

date Social Security begins running deficits

fits. There is almost no effect on Social

would move to 2024, a gain of just 7 years,

Even after the

Security's finances. The program begins to

while the shortfall in 2080 would be reduced

from 5.75 percent of payroll to 4 percent.26 In

run cash-flow deficits in 2021, just four years

largest tax

later. At the end of the 75-year actuarial win-

other words, even after the largest tax increase

increase in U.S.

dow, Social Security's deficits are just over one-

in U.S. history, the program would still require

half percent of payroll less than they would

a tax hike equal to a one-third increase in the

history, the pro-

have been without raising the cap.23

payroll tax in order to pay promised benefits.

gram would still

The most extreme proposal would be to

Moreover, this may actually overstate the

require a tax hike

eliminate the cap and not provide any addi-

gain to Social Security's finances. By dramati-

tional credit toward benefits (Figure 6). The

cally increasing marginal tax rates on incomes

equal to a one-

program would continue running surpluses

above $90,000 per year, raising the cap would

third increase in

until 2025, eight years longer than current

create a strong incentive for workers to shift

projections, but would still fall into deficit

assets from wages to income that is taxed at a

the payroll tax in

thereafter. This move would cut the shortfall

lower rate, such as capital gains or dividends.

order to pay

in 2080 by a little less than half, but it would

While the Social Security Administration's

promised

still exceed 3 percent of payroll.27

actuarial estimates attempt to adjust for such

income shifting, many observers believe that

Thus, even the most drastic option does

benefits.

7