|Scrapping the Social Security Payroll Tax Cap|
Last month, Sen. Jeff Merkley (D-Ore.) announced plans to introduce a bill to increase the annual cost-of-living adjustments for Social Security. He proposed to pay for it by raising the Social Security payroll tax rate of the wealthiest Americans -- those who make more than $250,000 per year -- closer to the rate already paid by middle and working class American workers.
Many people don’t know that any income above $117,000 per year is not taxed by Social Security (this limit on the amount of earnings subject to the tax is adjusted annually to keep up with inflation). That means that someone who makes twice the cap this year – $234,000 – pays the tax on only half of his or her wages. And those lucky enough to make at least $1.2 million per year are taxed by Social Security on less than one-tenth of their income.
In other words, workers who make $117,000 or less per year – the vast majority, as a recent analysis by the Center for Economic and Policy Research shows -- pay a higher Social Security payroll tax rate than the 5.6 percent who make more.
Merkley will be joining Sen. Bernie Sanders (I-Vt.) and Rep. Peter DeFazio (D-Ore.), who also have introduced bills to apply the Social Security payroll tax to wages above $250,000. These bills are similar to a proposal by Barack Obama during the 2008 presidential campaign. The Social Security Administration’s Chief Actuary estimates that the payroll tax cap sections of these proposals would reduce the program’s long-term budget shortfall by about 80 percent.
Others have proposed increasing or phasing out the Social Security payroll tax cap entirely, a concept popularly coined as “Scrap the Cap.” Sens. Tom Harkin (D-Iowa) and Mark Begich (D-Alaska), as well as Reps. Linda Sanchez (D-Calif.), Ted Deutch (D-Fla.) and Gwen Moore (D-Wis.), have introduced bills that would phase out the cap over five to ten years. The phase-outs of the cap in these proposals are estimated to eliminate 70 to 80 percent of the long-range shortfall.
While every one of these senators and representatives earn over $117,000 annually, Census Bureau data shows that only about 1 in 18 workers would pay more if the cap were scrapped, and only the top 1.4 percent (1 in 71 workers) would be affected if the tax were applied to earnings over $250,000.
It gets even more interesting when you look at different states and slices of the population. In the home states of Merkley, Harkin and Sanders (Oregon, Iowa, and Vermont), the top 4.2 percent, 3.5 percent and 4.0 percent of workers, respectively, would pay more if the Social Security payroll cap were phased out.
Even fewer women workers would be affected if the cap were abolished: only about 1 in 36 (2.8 percent) of them would pay more, and the top half of one percent would be affected if the tax were applied to earnings over $250,000. Similarly, only about 1 in 50 black or Latino workers would pay more if the cap were lifted entirely, and about 1 in 200 would be affected if earnings above $250,000 were subject to the tax.
As the retirement security of working Americans continues to be an important topic of debate, these proposals -- to strengthen Social Security by having the wealthiest Americans pay the same payroll tax rate as the rest of us – deserve the utmost consideration.
Nicole Woo is the director of Domestic Policy at the Center for Economic and Policy Research, a progressive economic think-tank.