Bryan Caplan  

Is the Social Security Tax Cap Disappearing?

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How will the U.S. resolve its long-run budget crisis?  I've long predicted the abolition of the Social Security tax cap.  As I told my Public Choice undergrads back in 2011:
I think we've likely to eliminate the Social Security payroll tax phase-out for high-income voters.  The budgetary situation is gradually becoming more desperate, so before too long the government will have to choose between cutting expensive popular programs (SS, Medicare, defense) or higher taxes.  Even people who don't benefit from these programs see them as socially desirable, so higher taxes are the path of least resistance.  Since voters are largely sociotropic, they probably wouldn't be comfortable explicitly making "the rich" pay the full burden.  But it's easy to frame the SS payroll tax phase-out as the elimination of a loophole rather than class warfare.  When you put it that way, even rich voters are likely to admit that this change is the least of available evils.
Only recently, though, did I take a look at what's been happening to the cap over the last quarter century.  In nominal terms, it almost tripled between 1989 and 2014.  In real terms, it's risen by over 25%.  Since I became a professor in 1997, the inflation-adjusted cap has grown over 20%.  Check it out:

Year

Nominal $ Cap

Real $ Cap

% Change

1989

48,000

48000

 

1990

51,300

48763

1.6

1991

53,400

48044

-1.5

1992

55,500

48668

1.3

1993

57,600

48916

0.5

1994

60,600

50196

2.6

1995

61,200

49310

-1.8

1996

62,700

49177

-0.3

1997

65,400

49780

1.2

1998

68,400

51258

3.0

1999

72,600

53511

4.4

2000

76,200

54667

2.2

2001

80,400

55605

1.7

2002

84,900

58054

4.4

2003

87,000

57984

-0.1

2004

87,900

57477

-0.9

2005

90,000

57153

-0.6

2006

94,200

57527

0.7

2007

97,500

58336

1.4

2008

102,000

58514

0.3

2009

106,800

61267

4.7

2010

106,800

59684

-2.6

2011

106,800

58735

-1.6

2012

110,100

58814

0.1

2013

113,700

59788

1.7

2014

117,000

60576

1.3


Claiming that events are already proving me right would nevertheless be foolish.  The real cap has barely risen since 2002.  What we've really seen is a massive increase from 1997-2002, with little change before or after.  This iron age of cap increases was bipartisan, spanning the late Clinton and early Bush years.

What should we conclude?  After a close look at the facts, I'm a little less confident in my long-run forecast.  If I'd been following the data closely in 2002, I would have expected rapid cap increases to continue.  Indeed, I probably would have given 1:2 odds that the cap would have been abolished by now.  As matters stand, I expect the cap to disappear around 2035.  As usual, I'm open to bets in the comments.


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COMMENTS (8 to date)
MG writes:

One of the reasons why this is not such a "no brainer Social Security fiscal solution" is that raising the cap would also result in an increase in the future benefits payable to those making even larger contributions. Of course, this can be "solved" by making the system even more progressive than it already is -- such that the real return to high contributors becomes even more negative.

This will make the system look even more like welfare (or a pure tax) than FDR's plan. It is claimed that Progressives would not like the public to pierce through that veil.

Floccina writes:

I would consider the elimination of the cap a good thing. That is because I think SS is a welfare that was disguised as a Ponzi scheme to gain the support of voters. Eliminating the cap makes it a little easier to see through the disguise. Once the median voter sees it as welfare program, the it can be greatly shrunk by giving all retirees the same minimal amount rather than giving high earners more. IMO this will make even the high earners better off because the tax will then be much lower than it would otherwise be.

Scott Sumner writes:

It's worth noting that the payroll tax that goes to infinity has been gradually expanding. A few decades ago it was 0%. Then 2.9%. Last year it rose to 3.8%. Still much less than the overall payroll tax below the cap (15.3%) but creeping higher.

I favor a much much higher payroll tax on upper income groups, combined with abolition of all income taxes.

David R. Henderson writes:

@Bryan,
Your bets are generally too long-run for me, and this is an extreme example. If I bet, I want to be alive to collect--or pay. 2035 is too far in the future.

John Thacker writes:

Respectfully, I think you are quite confused here about how Social Security works. The Social Security wage base limit is fixed by formula based on the average wage index. It's not allowed to go down, however. The "massive increase from 1997-2002, with little change before or after" is a direct consequence of the increase on average wages during that period and stagnation since.

It was set by statute pre 1981, but ever since then it has been by formula-- based on Average Wage Index, not inflation. The formula has not been changed; it has only been changes in the AWI that has affected the cap. The same Average Wage Index is used to set the income basis for determining how much retirees get in payments, not inflation.

What this means is that retirees are essentially paid on a basis of how their income compared in percentiles to current workers, or in other words kept fixed at a percentile level. If average worker gets much richer in real terms, then retirees get paid out more money, rather than falling behind today's workers. However, since the payouts cannot decline, if today's workers stagnate, retirees move relatively ahead. Being based on today's workers is consistent with the program being pay-as-you-go instead of individual accounts.

Due to the calculations, certain forms of increasing inequality can mean that the upper 10-15% have more income not subject to the tax, depending on how average wages grow versus wages of the upper 10-15%.

John Thacker writes:

One can, of course, make a good argument for why lifting the cap will happen and be the politically easiest course. But the evidence you produce is no evidence at all, since the formula to determine the cap hasn't been changed since 1981.

CEC writes:

You'll see real progress if Congress finally separates the taxable wage base from the benefits wage base. That would allow them to remove the tax limit but preserve the benefits limit. Admittedly, the unpopularity of such a move with the primary spurce of campaign support funds makes it more than passingly unlikely, but I can dream (and yes, it would increase my own tax burden substantially).

Vivian Darkbloom writes:

John Thacker is correct. It is misleading, as here, to suggest that because the cap has increased more than the rate of inflation social security will be more solvent (and particularly if this trend continues).

What Caplan fails to note is that initial *benefits* are computed under the same national average wage index. This was by design: contributions and benefits increase at a rate greater than inflation so that those contributions and benefits reflect rising productivity.

Merely continuing to raise the cap won't solve social security finances unless the benefit formula is also changed. That means "means testing".

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