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Home Publications Blogs CEPR Blog Can We Never Raise the Social Security Tax?

Can We Never Raise the Social Security Tax?

Written by Dean Baker   
Sunday, 20 October 2013 20:16

Most discussion in Washington of the projected long-term shortfall in the Social Security trust fund assumes that we can never raise the payroll tax. Many have advocated raising the cap on wages subject to the tax (currently just over $113,000), but raising the tax rate itself has largely been out of the question.

While there are good arguments for raising the cap (the increase in the share of income going over the cap due to the upward redistribution of income is a major reason for the projected shortfall), it is not obvious why increases in the tax rate at some future date should not be considered.

The Social Security Trustees projects that the average wage will be more than 60 percent higher in 2050 than it is today. Would there be some serious generational injustice if the tax rate was 2-3 percentage points higher at that point? This would still leave the after Social Security tax wage more than 50 percent higher than it is today.

Of course most workers have seen little or none of the benefits from the economy's growth over the last three decades. The increase in average wages is overwhelmingly due to an increase in wages in the top 10 percent of the workforce and especially the top 1.0 percent. The big gainers have been CEOs, Wall Street types and doctors (especially specialists). If the next forty years are like the last three decades, then any increase in the Social Security tax will be bad news for most workers.

But this is really a problem of upward redistribution of wage income, not a problem of Social Security. If we stop pursuing trade, labor, and macroeconomic policies that have the effect of redistributing income upward, then it is difficult to see the problem with phasing in modest increases in payroll taxes.

While the conventional view in Washington is that voters would never tolerate an increase in payroll taxes under any circumstances, there is reason to question this view. CEPR arranged a Google poll that asked a simple question: "At the beginning of 2013, the payroll that funds Social Security was... ." Respondents were offered the choices of raised, lowered, left the same, don't know.

Here's the reponse (n =  1534)


Remember, at the beginning of the year the payroll tax was raised by 2 full percentage points as the 2-year payroll tax holiday ended. Yet, only 28.9 percent of respondents were able to recognize this rise in taxes.

This sort of rapid single year rise in payroll taxes is not desirable nor do the projections imply such an increase would be necessary. Suppose instead that we raise the tax by 0.1 percentage points annually (0.05 percentage points on both the employee and employer) for twenty years. If we have created an economy in which ordinary workers share in the gains of economic growth this would mean that after-Social Security tax wages will rise by roughly 1.2 percentage points annually instead of 1.3 percentage points. Will this be an intolerable burden for voters?

Again, the clause "if we have created an economy in which ordinary workers share in the gains of economic growth" is a huge "if." But this just highlights the fact that the battle over Social Security unavoidable gets us back to the question of inequality. If we have an economy in which all are benefiting then covering the costs of workers' retirement is not a big deal. If the gains from growth continue to go almost exclusively to the rich, then ordinary workers will have difficulty funding their retirement, just as they will have difficulty meeting other expenses during their working years. 


Comments (7)Add Comment
Sounds like a great idea! We have perennial aggregate demand
written by Auburn Parks, October 20, 2013 9:24
shortages causing massive unemployment and underutilization of our productive capacity. And your solution is to reduce aggregate demand by raising what is already the most regressive tax in the whole country? No wonder progressives don't win elections nation-wide. Since 1980, the only 3 short periods of "full employment" (
Many Ways to Increase SS Revenue
written by David Gillooly, October 20, 2013 10:21
With the downsizing of US corporations more and more citizens, especially those over 50 find themselves working as contractors, otherwise known as 1099'ers. SS taxes and medicare taxes are near 14% and not all those are deductible. In addition health care must be paid.

Perhaps the better way would be to increase the cap and add a more progressive rate at higher income levels.

Lack of jobs and stagnate pay is the real issue that needs solving though. Solving those two issues would solve many of the issues we face today.

written by S.W. Anderson, October 21, 2013 12:09
My state has two huge and many smaller businesses heavily tied in with foreign trade, which any more means free trade. One of my U.S. senators is very much a progressive, the other a moderate. Both are solidly for free trade, its considerable downside for American workers and out-of-workers notwithstanding. Trying to convince them our free trade regime should be scrapped in favor of a new, hardball fair trade regime is like trying to convince Sen. James Inhofe global warming is real and carbon-based energy has a lot to do with it. My U.S. rep is a lockstep-marching Republican with a pavlovian relationship to the U.S. Chamber of Commerce. You'll find the story much the same in many, many states across the country.

Given how entrenched free trade is and what it does to U.S. workers and their situation; and given the perverse bipartisan and geographical checkerboard support it has, your ifs are too big to make your seemingly reasonable proposition feasible. Here and now, and for the foreseeable future, raising the SS income cap is the way to go.

written by Hopley Yeaton, October 21, 2013 10:41
I could support the rate increase and also an income cap increase if it were combined with a decrease in the growth rate. Use the more conservative inflation adjustment previously proposed and index the full retirement age to say 90% of life expectancy.
raise the payroll tax to save social security
written by coberly, October 21, 2013 10:25

your idea is sensible. your readers are not. i believe your readers do not represent working americans.

all of the injustices in the American economy are as you say. But even if they can't be cured... ESPECIALLY if they can't be cured... workers are going to need their Social Security. Raising the tax to pay for the rising expense of retirement (we are living longer) in an era when wages are not going up enough to provide the effective interest that comes to pay as you go from rising wages, will not be an excessive burden to the worker.... about 16 dollars per week out of about 800 dollars per week if average workers wages don't rise at all. "not fair" perhaps, but necessary to provide the funds for retirement. i know i... not rich... would be willing to give up sixteen dollars a week while i am working to make sure i can retire on time.

carefully explained to the workers, this would be acceptable to them. not carefully explained you will get the kind of responses you see here.

workers were polled a while back and most said they'd be willing to pay an extra one percent on the payroll tax right now if that's what it took to save social security.

well, that's the hard way to do it, but it may be "what it takes." when they see that works, in another ten years they may be ready for another one percent. and maybe by then the rest of us will have figured out how to restore "fairness" to the american economy.
Removing the cap is unfair and antithetical to SS
written by Jack Obazzi, October 22, 2013 1:39
The cap is there because SS is a social insurance plan, not a tax. Removing it undermines the basic idea that SS is pension insurance, not a welfare program.

Also, the income tax rate structure is built around the cap, with the jump from 28 percent to 33, then 35, then 39.6 percent occurs only above the cap. If you remove the cap, you make these effective rates 10.4 percent higher for self-employed (to 43.4, 45.4, and 50 percent) and 5.2 percent higher for employees (to 38.2, 41.2, and 44.8 percent). And on top of that the California income tax rates - 10.3 to 13.3 percent for 2014 - and you have self-employed paying a top combined rate of 63.3 percent of income! But wait - add in a 2.9 percent Medicare tax and the new 0.9 percent Medicare surcharge - and the combined rate would be 67.1 percent - more than 2/3rd of your income!!

That is the confiscatory levels that France has now and they are experiencing a massive exodus of high earners and young people who are not high earners but have aspirations to be ones - to the UK, and throughout the world. France is imploding under these soak-the-rich taxes. Greece has seen not only flight of its most productive citizens, capital flight, but a massive tax evasion industry and underground economy.

Nobody who has other options will suffer a 67.1 percent effective tax rate before other taxes - sales taxes, property taxes, utility taxes, gas taxes, healthcare tax, etc.

It won't work. Just like France's attempt to raise the top rate to 75 percent has failed. And at 66 percent, the French economy is imploding with emigration of their businesses, highest producers, new business startups, and best talented graduates to other countries.

reply to jack obazzi
written by coberly, October 22, 2013 9:28

i agree with you. something i have been trying to tell people on the left who seem obsessed with the idea of "make the rich pay."

the fact is that the rich do not need to pay for SS. Roosevelt designed it to be worker paid. And the workers can continue to pay for it themselves just like their parents and grandparents did. The cost of keeping SS "just as it is" with their longer life expectancy... and lower growth in wages.... amounts to less than a dollar a week per year. And should top out at about sixteen dollars a week, while their wages have grown to 160 dollars a week more than they get today... and keep on growing, so that at the end of the day they will have more, much more, AFTER the tax than they do today, plus have paid for a longer, richer retirement.

even if their wages do not grow, that extra sixteen dollars a week is small enough that no one should notice it... lower paid workers would pay less... and they will get the money back to pay for a longer retirement.

there is no need to beg for a handout from the rich. and much risk in "demanding" it. it is the fear of higher taxes that drives "the rich" to look for ways to "fix" (cut) social security. calling for higher taxes just plays into Peterson's hand.

but you have to convince "the left" that asking the workers to pay for their own retirement is not "unfair." that won't be easy. convincing the workers would be fairly easy. convincing their "defenders" won't. but its the only way to save Social Security... which is not supposed to be "welfare."

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