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Figure 7

Social Security's Payroll Tax Surplus or Deficit

(eliminate cap, no additional benefits compared with Cato proposal)

4

2

0

-2

-4

-6

-8

Cato Propos al

-10

With Cap Eliminated

-12

Such a massive tax

hike--the largest in

Year

U.S. history--

would have serious

Source: Social Security Administration; Cato Institute estimates.

consequences for

both taxpayers and

be facing a shortfall equal to 3 percent of pay-

That has led some observers to propose raising

the U.S. economy.

roll, whereas the Johnson-Flake bill would be

or even eliminating the cap on the amount of

running a surplus equal to 3 percent of payroll.

wages subject to the Social Security payroll tax.

However, it would

Given that the Johnson-Flake bill also deals

Such a massive tax hike--the largest in

do relatively little

with Social Security's other problems--it

U.S. history--would have serious conse-

for Social

would give workers ownership and control

quences for both taxpayers and the U.S. econ-

over their retirement funds; allow workers to

omy. However, it would do relatively little for

Security's solvency.

build a nest egg of real, inheritable wealth; and

Social Security's solvency. Even the most

provide higher benefits than Social Security

drastic and politically unlikely proposal,

can currently pay--it clearly represents a better

complete elimination of the cap without

approach to Social Security reform. Other

allowing any additional credit toward bene-

proposals for personal accounts would also be

fits, would gain just eight extra years of cash-

a significant improvement over proposals to

flow solvency for the program. More widely

raise or eliminate the cap.32

discussed proposals, such as increasing the

cap to 90 percent of covered wages (around

$150,000 per year), would extend the date by

Conclusion

which Social Security begins to run a deficit

by just three years and would have only an

insignificant effect on the program's long-

Social Security is insolvent. The troubled

term unfunded obligations.

retirement program will begin running deficits

Nor would this enormous tax increase

in just 12 years and is facing unfunded obliga-

address Social Security's other problems. It

tions of roughly $12.8 trillion. The options for

would not give workers ownership and con-

reform are limited. As then president Bill

trol over their money. It would not allow low-

Clinton pointed out, the only choices are to

raise taxes, cut benefits, or invest privately.33

and middle-income workers to accumulate a

10