February 16, 2005
By David C. John
Is a fix for Social
Security even worth discussing if it would only delay the system's
inevitable shortfalls by six or seven years? Groups such as AARP
think so and have proposed raising the payroll tax cap to make the
wealthy pay their "fair share" for Social Security. But this would
only patch the system's finances for a few years, rather than
solving the problem for good. And that's not the worst of it.
Raising the tax cap would raise taxes for many middle class
families, impose a tremendous burden on small business, slow the
economy, and cost jobs. In short, raising the payroll tax cap would
make Social Security an even greater burden than it is today.
pay Social Security payroll taxes on only the first $90,000 of
their annual income. This "wage cap" is indexed to the growth of
real wages in the economy and increases every year. The wage cap
serves to limits the amount of Social Security benefits that a
well-off retiree will receive. Even though Bill Gates and Donald
Trump earn millions of dollars a year, for the purpose of
calculating Social Security benefits, they earned just $90,000 in
Using the message that "Those who have
benefited from the growth in the economy should be asked to pay a
little more to help secure Social Security," groups such as AARP
call for raising the amount of income subject to Social Security
payroll taxes from $90,000 to somewhere between $125,000 and
$200,000. AARP, which favors a $140,000 cap, claims that this
simple move would "solve" 43 percent of Social Security's projected
Polls show that raising the wage cap has some
popular support. A February 10, 2005, Washington Post poll
showed that 81 percent of those questioned supported raising the
Respondents might be more skeptical, however, if more people knew
what AARP isn't telling them: raising the wage cap is no fix. It
would postpone Social Security's problems for only a few
A recent report from the Social Security
Administration (SSA) examined the effects of not just raising the
wage cap, but of eliminating it completely. Under this radical
approach, Bill Gates and Donald Trump would pay Social Security
taxes on every dollar that they earn. They would also receive
benefits on those earnings. The scoring memo also examined a still
more radical proposal: that people would pay Social Security taxes
on all of their income but receive benefits only on income below
$87,900, the wage cap that was used in the SSA study. This would be a major
shift from the current policy that Social Security benefits are
based on a worker's taxable income. Still, neither of these
policies would improve Social Security's cash flow very much, and
both are much more ambitious than AARP's plan.
SSA's actuarial study showed that that
eliminating the payroll tax cap entirely would only delay the start
of Social Security's annual deficits by six years, from 2018 to
2024. Eliminating the wage cap on payroll taxes while paying
benefits on only the first $87,900 of earnings would delay the
start of annual deficits by an additional year, to 2025.
As well, these policies would delay the onset
of massive deficits by only a few years. As Social Security now
stands, annual deficits will first reach $100 billion a year (in
2003 dollars) in 2022, according to the 2003 Social Security
Eliminating the wage cap delays $100-billion deficits until 2029,
or only seven years. On the other hand, subjecting all earnings to
payroll taxes but only paying benefits on income up to the current
wage cap delays the start of those $100-billion deficits until
If completely eliminating the wage cap only
delays deficits by six or seven years, how could just raising it to
$140,000 solve a significant part of Social Security's financial
Another problem with raising the wage cap is
that for every taxpayer with an income of over $500,000 affected by
raising the tax cap to $125,000, 27 taxpayers with lower incomes
would pay higher taxes, too.
In 2001, the majority of taxpayers earning more than $90,000 had
incomes between $90,000 and $150,000. Only a very small number of
the 130 million tax returns filed in 2001 (0.3 percent of
taxpayers) showed income between $500,000 and $1 million, and an
even smaller number (0.1 percent) showed incomes of over $1
Raising the cap to $125,000 would directly
increase taxes for 7 million middle-class families. Going to the
$140,000 advocated by the AARP would cost many of these families
even more. At up to an additional $2,650 in taxes per year, this
change might not mean much to millionaires, but the families who
would bear the brunt of this tax increase would surely
Perhaps the most significant impact of raising
the wage tax cap would be on small-business owners and the
self-employed. Small firms and individual entrepreneurs are the
driving force of rapid innovation and economic growth in the United
States. Small-business owners would have to pay higher taxes on
behalf of all their workers were the wage tax increased, and they
might have to spend more on salaries, too, to make up the drop in
workers' take-home pay. The self-employed would face a direct tax
hike twice as great as other workers because they pay both side of
the payroll tax.
No surprise, a higher tax cap would sap
economic growth and destroy job opportunities. A 2001 report from
the Center for Data Analysis modeled the economic impact of
eliminating the cap on wages subject to the payroll tax. The results of this
small change-actually the largest tax increase ever-would be
In other words, lifting the wage cap would be
quite expensive in terms of its effect on the economy and on
millions of individual workers and families.
Raising the wage cap has been greatly
oversold. It would directly increase taxes for millions of
middle-class families who can ill afford to give up even more of
their paychecks. It would increase benefits for the wealthy, who
scarcely need the extra money. And it would harm the economy,
slowing growth and job creation, as well as impacting millions of
families' savings. Worst of all, for all these terrible effects,
raising the wage cap would push Social Security's massive
shortfalls only a few years into the future. Social Security is
already a bad deal for most Americans and a burden for younger
generations. Raising the wage cap would make it worse.
John is Research Fellow in Social Security and Financial
Institutions in the Thomas A. Roe Institute for Economic Policy
Studies at The Heritage Foundation.
Show references in this report
How America Can Afford to Grow Older: A Vision for the
Future," Speech by AARP President Bill Novelli before the
National Press Club on February 9, 2005, at
 "Social Security
Problems Not a Crisis, Most Say," Washington Post, February
10, 2005, p. A1.
 Chris Chaplain, Actuary, and Alice H. Wade,
Deputy Chief Actuary, Social Security Administration,
"Estimated Long-Range OASDI Financial Effects of Eliminating
the OASDI contribution and Benefit Base." Numbers in this memo have been
converted into 2003 constant dollars by The Heritage
 Because the study was
finished in October 2003, it used the 2004 wage cap of $87,900
instead of the 2005 wage cap of $90,000.
Social Security Administration, 2003 Annual
Report of the Board of Trustees of the Federal Old-Age and
Survivors Insurance and Disability Insurance Trust Funds
(Washington, D.C.: U.S. Government Printing Office, 2003), at
 Numbers based on a
Heritage Foundation analysis of 2001 federal income tax return
 D. Mark Wilson,
"Removing Social Security's Tax Cap on Wages Would Do More Harm
Than Good," Heritage Foundation Center for Data Analysis
Report No. 01-07, October 17, 2001, at
Raising the wage cap would just make Social Security a greaterburden.
Entitlements, Taxes & Spending Initiative of the Leadership for America Campaign
David C. John
Senior Research Fellow in Retirement Security and Financial Institutions
Read More >>
Heritage's daily Morning Bell e-mail keeps you updated on the ongoing policy battles in Washington and around the country.
The subscription is free and delivers you the latest conservative policy perspectives on the news each weekday--straight from Heritage experts.
The Morning Bell is your daily wake-up call offering a fresh, conservative analysis of the news.
More than 200,000 Americans rely on Heritage's Morning Bell to stay up to date on the policy battles that affect them.
Rush Limbaugh says "The Heritage Foundation's Morning Bell is just terrific!"
Rep. Peter Roskam (R-IL) says it's "a great way to start the day for any conservative who wants to get America back on track."
Sign up to start your free subscription today!
The Heritage Foundation is the nation’s most broadly supported public policy research institute, with hundreds of thousands of individual, foundation and corporate donors. Heritage, founded in February 1973, has a staff of 275 and an annual expense budget of $82.4 million.
Our mission is to formulate and promote conservative public policies based on the principles of free enterprise, limited government, individual freedom, traditional American values, and a strong national defense. Read More
© 2013, The Heritage Foundation Conservative policy research since 1973