Why Doesn't Congress Raise or Eliminate Social Security's Payroll Tax Cap?

For nearly eight decades, Social Security has been a financial savior for senior citizens. According to an analysis from the Center on Budget and Policy Priorities, the mere presence of Social Security, and its guaranteed monthly payout for those who qualify for a benefit, keeps 22.1 million people out of poverty, including more than 15.3 million retired workers. Without Social Security, the CBPP estimates that senior poverty rates would more than quadruple.

And yet, despite the program's importance, Social Security is less than two decades away from disaster.

Social Security's cash shortfall is inching closer

Every year, the Social Security Board of Trustees releases its short- and long-term outlook (10 and 75 years, respectively) for America's most important social program. Since 1985, the Trustees have cautioned that the long-term forecast didn't have enough revenue to cover the existing payout schedule over the next 75 years. As time has passed, Social Security's projected shortcomings have grown and inched closer.

In the 2018 report, released in early June, the Trustees estimated that Social Security would hit an unwelcome inflection point this year. That being that the program would expend more than it collects for the first time since 1982. Although this net cash outflow is relatively small ($1.7 billion) compared to the $2.89 trillion currently in the program's reserves, the mere fact that the program has switched from surpluses to outflows demonstrates the unsustainability of the existing payout schedule.

As things stand now, Social Security's excess cash is projected to be gone by 2034. While that doesn't mean bankruptcy, it does suggest that a benefit cut of up to 21% may be needed to sustain payouts through 2092, without the need for any further reductions. With more than three out of five current retirees leaning on Social Security for at least half of their monthly income, a 21% cut would become a major problem.

Popular opinion says raise the payroll tax cap

Social Security is facing an estimated $13.2 trillion cash shortfall between 2034 and 2092, and America is looking to Congress for a fix.

Lawmakers on Capitol Hill have three ways they can approach this problem: (1) raise additional revenue, (2) cut costs, or (3) do a combination of the two. But if you were to ask the public, the choice is pretty simple: raise revenue.

Back in 2014, with the help of the Center for Retirement Research, The Washington Post ran an informal online survey that asked respondents to choose "fixes" to the Social Security program that they would stand behind. There were 12 possible choices (six to raise revenue and six to cut benefits), complete with explanations of how they would impact the program. The top choice -- and by a mile, might I add -- was raising or eliminating the payroll tax cap. Overall, roughly seven in 10 respondents could stand behind increasing the tax cap. The next-closest option, raising the full retirement age, only garnered about 45% support.

In 2018, all earned income between $0.01 and $128,400 is subject to Social Security's 12.4% payroll tax. However, earned income above this cap (i.e., greater than $128,400) is exempt. This means more than 90% of all American workers are paying into Social Security with every dollar they earn, while fewer than one in 10 high-earning Americans gets some, or most, of their income exempted from the payroll tax. Increasing or eliminating this cap would raise additional revenue for Social Security and, presumably, narrow or erase the $13.2 trillion cash shortfall between 2034 and 2092. In other words, there'd be no need for benefit cuts.

Here's why the payroll tax cap hasn't been dramatically increased or eliminated

In a normal year, the payroll tax earnings cap increases in step with the National Average Wage Index. But you might be wondering why, if Americans overwhelmingly support a measure that would impact fewer than one in 10 workers, the payroll tax cap hasn't been dramatically increased or eliminated in its entirety.

For starters, the reason the payroll tax cap exists is because there's also a cap on maximum payouts from Social Security at full retirement age. Each year, this maximum payout is updated by the Social Security Administration. In 2018, it happens to be $2,788 a month. It simply wouldn't make sense for the program to tax earned income up to say $400,000 or $1 million if the maximum payout achievable at full retirement age is "only" $2,788 a month. In other words, there's a reason both caps exist.

Secondly, amending Social Security would require bipartisan support (I'll wait for you to stop laughing). Things are arguably more partisan than ever in Washington, and Democrats and Republicans both have markedly different proposals for fixing Social Security. Since both parties have a solution that would completely erase the $13.2 trillion long-term cash shortfall, neither feels incented to find common ground with their opponent. Thus, a perpetuated stalemate that will only end with bipartisan support or a supermajority (60 or more seats held by one party) in the Senate, which hasn't happened for four decades.

Last but not least, don't overlook who this payroll tax increase would impact: the wealthy. Sure, the wealthy are much less likely to be reliant on Social Security during retirement than the average American worker, but they're also much more likely to make political contributions during election years. If the rich were to suddenly face the prospect of higher payroll taxes, it wouldn't be out of the question that campaign donations lessen to the party that passes such a measure. In short, there could be political motivations not to increase the payroll tax cap.

Clearly, something needs to be done to fix Social Security, but it'll almost certainly require a bipartisan compromise if it's to happen.

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