Social Security: Cap or no cap?

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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 on 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.