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Social Security: Cap or no cap?

By Jennie L. Phipps · Bankrate.com
Thursday, April 18, 2013
Posted: 3 pm ET

The most frequently suggested solution to Social Security's potential shortfall is to raise the cap on earnings. That would mean people who earn more than the current cap of $113,700 and their employers would owe payroll taxes onĀ earnings above that level.

In some suggested scenarios, those who pay more wouldn't get more. Currently, Social Security's retirement benefits are calculated so that lower-earning workers get back 90 percent of the first $767 of their average indexed monthly earnings over 35 years. Those who earned more over that time get an additional 32 percent of the next $3,857. Higher earners also get 15 cents on the dollar for every additional $1 they earn over $4,624 up to the current earnings cap.

Eliminating the cap and raising what Social Security pays high earners wouldn't solve any Social Security shortfall. More money would come in, but more would go out.

If we raise the cap but we don't pay high earners more, then Social Security begins to look more like a retirement planning welfare program. Andrew Biggs, a resident scholar at the American Enterprise Institute and former principal deputy commissioner of the Social Security Administration, pointed out in The New York Times Wednesday that if we eliminate the cap and don't pay more, "a person earning $225,000 would pay roughly four times more in taxes than he'll receive in benefits."

Biggs adds that the top federal tax rate on earned income is currently 45 percent -- nearly half of what a high-earner makes. He calculates that eliminating the cap on Social Security would effectively raise the top tax rate by about 12 percentage points. That's a whopping tax increase with no commensurate increase in benefits.

I wrote recently about the administration's proposal to change how cost-of-living increases are calculated -- a way to partially shore up Social Security by spreading the burden to include most recipients. Reader reaction was negative, but that proposal still seems far more fair that putting the burden solely on people who earn the most.

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13 Comments
ed137
April 20, 2013 at 10:13 am

It's a tax, not a benefit, so there should be no cap.

Don
April 19, 2013 at 3:47 pm

I'm happy to hear the truth about the high income earner already subsidizing the system if you'll agree to hear the truth about the distribution of wealth in this country. Despite all their complaints about having to pay the lion's share of taxes, the top (take your pick--1%, 5%, 10%, 20%) don't seem to have any problems continuing to accumulate more and more of the wealth of the land at the expense of everybody else.

egg
April 19, 2013 at 2:12 pm

Social security is supposed to be a "safety net" and thus it was designed to give a greater proportion to those with lower income. It was never designed to be a primary retirement system for anyone. So having higher income folks get more out of it is contrary to the design of the system.

AKFed
April 19, 2013 at 12:56 pm

As shills for the 1% I would expect AEI to argue against removing the cap on earnings subject to SS withholding. Fact is, SS was never created to be a "fair" system, it was designed to ensure that after a life of working nobody would live in abject poverty. The majority of us, myself included, have paid into SS with no expectation that I would get back everything I put into it. I'm OK with that if that is the price of living in a society that protects our old. This opposition to eliminating the cap and resistance to paying a fair share in taxes to support education and our nation's infrastructure is symptomatic at the greed that is eroding the morality of our society.
I say eliminate the cap and implement a means test to receive benefits in order to preserve the integrity of the program. The chained CPI is an erosion of income for those who can least afford it. The proposal to increase eligibility age leaves many of those who work at physically demanding jobs unprotected since there's a limit on how long a person can work before our bodies begin to break down.

john
April 19, 2013 at 10:47 am

What is the difference in making government employees pay more into their retirement and not getting anything more in benefits. Currently FERS employees pay .08% into their basic annunity. Congress, mostly the Republicans wants the FERS employees to contribute 5.5% with no additional benefits. Just saying....

john
April 19, 2013 at 10:46 am

What is the difference in making government employees pay morfe into their retirement and not getting anything more in benefits. Currently FERS employees pay .08% into their basic annunity. Congress, mostly the Republicans wants the FERS employees to contribute 5.5% with no additional benefits. Just saying....

gnatman
April 19, 2013 at 10:36 am

The article could not have any other outcome when it is structured by a AEI spokesperson.

SSA is not a purchased annuity where the contribution and benefit is matched based on financial variables. SSA is a generation skipping social insurance. FICA is under title VIII and SSA is under title II.

Most of SSA problems arise as a result of the increasing life expectancy in the USA. It was 40 years in 1880 and now is 80.

Lin
April 19, 2013 at 10:33 am

NO CAP!

Donna Spellman
April 19, 2013 at 10:30 am

If we leave the cap on earnings for the person, but eliminate it from the employer, that would eliminate the need to pay the retiree a higher benefit. If a firm on Wall St can afford to pay their CEO millions of dollars a year, then they should be able to pay Social Security taxes on that amount. If they can't afford the Social Security taxes, then CEO pay should be lowered to a more reasonable amount. It is time to get real. As it is, these highest earners are finished paying their FICA taxes after only the first few hours of the year!

AA
April 19, 2013 at 8:02 am

WOW This is the first honest article I have ever seen about raising the cap. I have been trying to explain this to people for years. Nobody wants to hear the truth that the high income earner is already subsidizing the system and removing the cap would make the system more like welfare.