According to the Social Security Trustees, the Social Security Trust Fund will be able to pay full benefits until 2033, and incoming payroll taxes will be sufficient to pay about 75 percent of benefits thereafter. Some are using this modest gap in long-term funding as a pretext to justify proposals for large cuts in Social Security benefits. Others have proposed closing the gap by increasing income received by the Trust Fund. One way to increase revenue is to raise the Social Security tax cap.
Social Security's Current Cap
Under current law, Social Security contributions and benefits are based on earnings that fall below an annual cap, which is $113,700 in 2013. In the past, the tax cap has been set at a level that covered about 90 percent of all earnings paid in covered employment. Currently, however, only about 83 percent of earnings are subject to the Social Security payroll tax. This erosion in covered earnings largely stems from the fact that wages for the highest paid six percent of workers have been rising faster than wages for the vast majority of people who make less than the cap.
Restoring the Cap to 90 Percent
The extraordinary growth of income for those at the highest end of the wage scale was not anticipated by those who established the formulas that fund Social Security today. Wages for middle and lower income workers have remained stagnant for over a decade, while higher-wage workers have seen significant wage growth during that time. Restoring the tax cap to a level that would again cover 90 percent of earnings would reduce Social Security's long-term deficit over its 75 year solvency period by nearly one-fourth.
Eliminating the Cap
Some have suggested that the tax cap should be eliminated altogether. These options include proposals to provide reduced benefits to workers for their contributions above the new maximum, in addition to proposals which would provide no benefits at all for these additional contributions. Eliminating the cap without allowing for the possibility of additional benefits for those making the additional contributions would eliminate Social Security's funding shortfall. However, it would also break the current link between a worker's contributions and the benefits received upon retirement. This would be a substantial departure from the contributory nature of the Social Security program and would undermine the broad public support Social Security has enjoyed for over 70 years. Gradually eliminating the cap, and counting earnings toward benefits would eliminate a substantial portion of the shortfall.
Government Relations and Policy, February 2013