Will raising the cap save Social Security?

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Democratic presidential candidate Sen. Bernie Sanders, (D-Vt.) is in favor of putting Social Security on a more solid financial footing by raising the cap on earnings that are taxed. Currently, earnings up to $118,500 are taxed for this purpose.

On his website, Sanders says, “By lifting this cap so that everyone who makes over $250,000 a year pays the same percentage of their income into Social Security as the middle class and working families, [we] would not only extend the solvency of Social Security for the next 50 years, but also bring in enough revenue to expand benefits by an average of $65 a month; increase cost-of-living-adjustments, and lift more seniors out of poverty by increasing the minimum benefits paid to low-income seniors.”

Is Sanders right? Is making Social Security solvent as simple as raising the amount of income covered by payroll taxes?

Taxing high earners doesn’t help much

Yes and no, says Karen Smith, a senior fellow in the income and benefits policy center at the Urban Institute, a public policy think tank. Smith has spent the last 30 years developing models that predict the financial results of Social Security and other forms of taxation. She says that if the cap were removed altogether in 2016 and everyone paid what they pay now on all the income they made, this would be the outcome:

  • The trust fund reserves would be extended through 2055 (an additional 21 years).
  • Money would accumulate quickly in the trust funds and it would earn significant interest over time.
  • All workers would feel the pain of increased payroll taxes because employers would reduce wages across the board to compensate for their share of the increase.
  • Raising the wage cap would reduce other federal income tax collections because people would earn less money. But overall — adding together payroll and income taxes — the government still would collect more.
  • The impact of high earners paying more into Social Security would be mitigated by increases in Social Security payments to them after they retire.

The only real answer, Smith says, is to raise the payroll tax on everybody — high and low earners. “We aren’t going to get to solvency without raising the payroll tax,” she says. “The only other way to get to solvency is to lower benefits.”

How much tax is enough?

How much increase in the payroll tax is required from the current 12.4% — half paid by workers and half paid by employers? Smith writes in her report:

  • A 1-point rate increase to 13.4%, phased in over 10 years beginning in 2016, would extend trust fund reserves an additional 5 years.
  • A 2 percentage-point increase to 14.4% would extend reserves an additional 18 years.
  • A 3 percentage-point increase to 15.4% would extend reserves through 2087.

Sounds horrendous and politically impossible, but Smith believes some version of this will eventually happen. Social Security by law can’t pay out more money than it has. It will exhaust its trust funds in 2034 — 18 years from now. At that point, without an increase in revenues, the only way out is to cut benefits by about 25%, another politically impossible scenario. If that were to happen, “Social Security would still be there,” Smith says, “but for low-income seniors a 25% cut is a huge reduction.”

Where do we go from here? Are you willing to pay more taxes to shore up Social Security?

There is no shortage of ideas for making Social Security more stable by changing how we collect payroll taxes.

Follow me on Twitter @jennielp.