Can Removing the Tax Cap Save Social Security?

By Shantanu Bagchi

http://d.repec.org/n?u=RePEc:tow:wpaper:2014-05&r=dge

The maximum amount of earnings in a calendar year that can be taxed by Social Security in the U.S. is currently capped at $106,800. In this paper, I use a general-equilibrium overlapping-generations model to examine if removing this cap can solve Social Security’s budgetary problems. I find that in general, removal of the cap increases Social Security revenues, but by only a small percentage, and most of these extra revenues go towards paying benefits to high-income retirees no longer subject to the cap. Even when the cap is removed only from taxes but retained on the amount of earnings creditable towards Social Security benefits, the fiscal advantages are quite small.

I consider this paper part of a new research agewnda that seeks to determine whether taxing more the rich can help reduce budget shortfalls. Two papers discussed a month ago did not find much margin as one would hope, and this one confirms it if you focus solely on old age pension, which turns out not to be that great at revenue generating or redistribution.