Don’t raise or eliminate the cap

Taxes by

Article Highlights

  • By eliminating the cap, a person earning $225,000 would pay 4 times more in taxes than he'll receive in benefits.

    Tweet This

  • Today's payroll tax ceiling isn't unusually low, about 84% of all wages are taxed, almost the average since 1935.

    Tweet This

  • Raising the cap would sap support for Social Security and hurt the economy.

    Tweet This

Editor's note: This article originally appeared in The New York Times' Room for Debate in response to the question: Should Social Security taxes affect all wages?

Under Roosevelt's original design for Social Security, high earners wouldn't even have participated. The eventual legislation included the rich, but with a contribution cap to distinguish Social Security from "the dole."

Subscribe to
The Ledger
Get AEIecon's weekly snapshot of news, views, and economic cues.

First Name:
Last Name:
Zip Code:

As a Social Security Administration report put it, "The upper limit on the tax was designed to assure that no one contributed directly more than the value of the protection he received." It also meant that lower earners must pay for their benefits, which the administration says is "one of the basic principles of the Social Security program and is largely responsible for its widespread public acceptance and support."

But by eliminating the cap, a person earning $225,000 would pay roughly four times more in taxes than he'll receive in benefits. A growing resemblance to a welfare plan would be inescapable.

Today's payroll tax ceiling isn't unusually low. Currently, about 84 percent of all wages are taxed, almost precisely the average since 1935. While coverage has fallen from 90 percent since the mid-1980s, research points to health care as a major culprit.

When employers' health outlays rise they reduce wages for employees, with middle class workers hit the most. The solution isn't to tax the rich more, it's to address health care costs. And while Canada sets its pension tax ceiling at the average wage - and the U.K. at 1.15 times and Germany and Japan at 1.5 times the average - Social Security's tax ceiling is 2.9 times the average wage, helping give the U.S. the most progressive tax code in the developed world.

Eliminating the tax cap would be a huge tax increase. The top federal tax rate on earned income today is 45 percent. Adding state income taxes boosts it to around 50 percent. Eliminating the tax max effectively raises the top tax rate by around 12 percentage points. And that's before we've done anything to fix Medicare and Medicaid.

Moreover, liberal economists Emmanuel Saez and Jeffrey Liebman concluded that, because of income shifting and behavioral responses, net collections from eliminating the cap would be less than 60 percent of what static projections claim.

Even at that level of revenue, eliminating the tax cap would lead to large near-term Social Security surpluses - which would be spent rather than saved -- while doing far less to boost the system's long-term prospects.

Raising the cap would sap support for Social Security and hurt the economy, while failing to put the budget on a sustainable track. 

Andrew G. Biggs is a resident scholar at the American Enterprise Institute and former principal deputy commissioner of the Social Security Administration. 

Also Visit
AEIdeas Blog The American Magazine
About the Author


Andrew G.

What's new on AEI

Making Ryan's tax plan smarter
image The teacher evaluation confronts the future
image How to reform the US immigration system
image Inversion hysteria
AEI on Facebook
Events Calendar
  • 01
  • 02
  • 03
  • 04
  • 05
Wednesday, September 03, 2014 | 9:00 a.m. – 10:30 a.m.
From anarchy to Augustus: Lessons on dealing with disorder, from Rome’s first emperor

We invite you to join us for two panel discussions on how Augustus created order from chaos 2,000 years ago, and what makes for durable domestic and international political systems in the 21st century.

Event Registration is Closed
Wednesday, September 03, 2014 | 12:00 p.m. – 1:30 p.m.
Multiple choice: Expanding opportunity through innovation in K–12 education

Please join us for a book launch event and panel discussion about how a marketplace of education options can help today's students succeed in tomorrow's economy. Attendees will receive a complimentary copy of the featured book.

Thursday, September 04, 2014 | 12:00 p.m. – 1:30 p.m.
How conservatives can save the safety net

Please join us for a luncheon event in which our panel will discuss what conservatives can learn from how liberals talk and think about the safety net and where free-market economics, federalism, and social responsibility intersect to lift people out of poverty.

No events scheduled this day.
No events scheduled this day.
No events scheduled this day.
No events scheduled this day.
No events scheduled this day.
No events scheduled this day.