On Feb. 11, the top 1 percent of American workers finish paying their Social Security payroll taxes for the year. That's because the maximum amount of annual earnings subject to the tax is capped at $118,500 (this level is adjusted for inflation each year). Yet most Americans don't know that there is a Social Security payroll tax cap, because most don't make enough money to ever hit it.
Meanwhile, the Social Security trust fund, which currently holds $2.8 trillion, is projected to be drawn down by about 2033 (according to the Social Security trustees). After that point, if no changes are made to the program, retirees will receive only about 75 percent of scheduled benefits. One of the main causes of this projected shortfall is the growth in inequality over the last 30 years. Back in the 1980s, the last time changes were made to Social Security, Congress and President Reagan decided to build up the trust fund with workers' payroll taxes in order to essentially pre-fund the coming retirement of the Baby Boom generation.
As a result, the trust fund has been steadily building up over the decades, but they weren't able to predict how much income gaps would widen over that time. So while the payroll tax cap has been adjusted for inflation every year, the income of the richest workers has increased faster, allowing more and more earnings to escape the tax, and causing the payroll tax to collect less than needed.
To help avoid a future reduction in benefit payments and move the payroll tax cap back in line with what Congress and Reagan intended, a handful of bills were introduced in the last Congress to raise or eliminate the payroll tax cap. Sponsors included Reps. Linda Sanchez (D-Calif.), Ted Deutch (D-Fla.), Gwen MooreGwen MooreHouse Dems urge Senate panel to vote on Ex-Im Bank nominee Maryland Senate primary intensifies Big bucks spent honoring lawmakers MORE (D-Wis.), Peter DeFazio (D-Ore.) and John Larson (D-Conn.), as well as Sens. Patty MurrayPatty MurraySenate passes broad spending bill with .1B in Zika funds The Hill's 12:30 Report Senate approves Zika funds MORE (D-Wash.) and Bernie SandersBernie SandersSanders aide: We're trying to open party to 'new blood' Sanders to Larry David: 'I want you to keep your job' Clinton allies blame Bernie for bad polls MORE (I-Vt.). Most of the bills were estimated by the chief actuary of Social Security to alleviate between 70 and 80 percent of Social Security's long-range shortfall.
How many people would be affected if the cap were eliminated? My colleagues at the Center for Economic and Policy Research (CEPR) have looked at Census Bureau data and found less than the top one in 15 workers would be affected if the cap were eliminated entirely. For women, only the highest-income one in 32 would pay more. And for black or Latino workers, only the top one in 43 would be affected if the cap were scrapped.
What do voters think about this idea? The nonpartisan National Academy of Social Insurance used a market research technique to study Americans' views on a number of potential changes to Social Security. They found that more than four in five support gradually eliminating the cap on earnings subject to the Social Security tax. In addition, "83 [percent] of respondents — including 71 [percent] of Republicans, 92 [percent] of Democrats, and 84 [percent] of independents — agree it is critical to preserve Social Security benefits for future generations, even if it means increasing the Social Security taxes paid by top earners."
Meanwhile, it's also important to remember that Social Security will continue to take in payroll taxes after the trust fund is spent down. That means Social Security will still be there, even if Congress were to make no changes to the program. Retirees will still receive significant support, albeit about 25 percent less than expected.
To illustrate this point, my colleagues at CEPR have estimated how much in Social Security retirement benefits our current senators could expect even if no reforms were made to the program. Looking at some of the newest members of the Senate, if Tom CottonTom CottonThe Hill's 12:30 Report GOP senators: Obama bathroom guidance is 'not appropriate' Cotton: We have an 'under-incarceration problem' MORE (R-Ark.) were to retire at the age of 67 in 2044, he would still receive an annual benefit of $34,812 (in 2014 dollars). If Gary Peters (D-Mich.) were to retire in 2024 at the age of 66, he'd get $36,387 per year until the trust fund were depleted, and then $27,290 annually for the rest of his life. That's real money.
As the House and Senate continue to debate the merits of changes to Social Security, raising or eliminating the payroll tax cap should be a leading contender. After all, what other option wipes out over two-thirds of the program's projected shortfall, avoids both benefit cuts and middle-class tax increases and is supported by a wide majority of Americans?
Woo is the director of domestic policy at the Center for Economic and Policy Research.