Worth noting that removing the earnings cap without locking away surplus revenues so they are actually saved for future Social Security expenditures will merely result in Congress using the added revenue to pay for other obligations including health care costs, interest on the debt, and tax cut extensions, among other potential expenditures. Furthermore, eliminating the payroll tax cap would only cover half of the long-term funding shortfall and would involve a massive marginal tax increase on the upper middle class, making such a proposal politically and economically challenging. As we highlighted in a previous Debt Digest, increases in the marginal tax rate for higher-income earners come at the high cost of reduced innovation and economic growth. See my colleague's Brian Riedl's work for further details on eliminating the payroll tax cap that are often overlooked: https://manhattan.institute/article/problems-with-eliminating-the-social-security-tax-cap
Federal government borrowing to cover Social Security's cash-flow shortfall since 2010 has already contributed $1 trillion to the national debt. Between now and 2033 when the Social Security trust fund is depleted and thus the program has exhausted its borrowing authority, the federal government will need to borrow an additional $4 trillion to cover current benefit costs. Please see my recent Cato Institute analysis, the Social Security Trust Fund Myth, for further details. https://www.cato.org/policy-analysis/social-security-trust-fund-myth
This is inaccurate. Social Security is prohibited by law from using general revenues to fund Social Security benefits. See below for details on Social Security’s financing.
What is actually happening is that Social Security is cashing in some of its Treasury bonds to cover current benefits - that is, the federal government is returning funds it borrowed from Social Security in the past. Paying back money to a creditor is the opposite of lending money! If the non-Social Security portion of the budget needs to borrow money to repay the Social Security Trust Fund, that is not the fault of Social Security.
Your source here is someone who worked closely with SSA’s Chief Actuary for many years.
How Is Social Security Funded?
Social Security is mainly funded through a dedicated payroll tax created by the Federal Insurance Contributions Act. Employers and employees each pay 6.2 percent of wages, with a cap on the amount of wages subject to the tax ($168,600 for 2024, adjusted annually for growth in economy-wide wages).3 Self-employed pay both the employee and the employer share of the tax. Those revenues are credited to the OASI and DI trust funds, which keep track of the programs’ receipts and expenses.
The programs also receive income from a tax on Social Security benefits paid by higher-income beneficiaries, as well as income generated by the investment of the trust fund reserves in non-marketable U.S. Treasury securities.
Remove the earnings cap on Social Security taxes, means test Social Security benefits. The federal government’s major fiscal problem is solved.
XXX
Worth noting that removing the earnings cap without locking away surplus revenues so they are actually saved for future Social Security expenditures will merely result in Congress using the added revenue to pay for other obligations including health care costs, interest on the debt, and tax cut extensions, among other potential expenditures. Furthermore, eliminating the payroll tax cap would only cover half of the long-term funding shortfall and would involve a massive marginal tax increase on the upper middle class, making such a proposal politically and economically challenging. As we highlighted in a previous Debt Digest, increases in the marginal tax rate for higher-income earners come at the high cost of reduced innovation and economic growth. See my colleague's Brian Riedl's work for further details on eliminating the payroll tax cap that are often overlooked: https://manhattan.institute/article/problems-with-eliminating-the-social-security-tax-cap
Social Security contribes $0 to the federal debt. You need to look elsewhere for debt reduction.
I agree with increasing the earnings cap, as it will help Social Security solvency. But it will do nothing for the federal debt.
Federal government borrowing to cover Social Security's cash-flow shortfall since 2010 has already contributed $1 trillion to the national debt. Between now and 2033 when the Social Security trust fund is depleted and thus the program has exhausted its borrowing authority, the federal government will need to borrow an additional $4 trillion to cover current benefit costs. Please see my recent Cato Institute analysis, the Social Security Trust Fund Myth, for further details. https://www.cato.org/policy-analysis/social-security-trust-fund-myth
This is inaccurate. Social Security is prohibited by law from using general revenues to fund Social Security benefits. See below for details on Social Security’s financing.
What is actually happening is that Social Security is cashing in some of its Treasury bonds to cover current benefits - that is, the federal government is returning funds it borrowed from Social Security in the past. Paying back money to a creditor is the opposite of lending money! If the non-Social Security portion of the budget needs to borrow money to repay the Social Security Trust Fund, that is not the fault of Social Security.
Your source here is someone who worked closely with SSA’s Chief Actuary for many years.
How Is Social Security Funded?
Social Security is mainly funded through a dedicated payroll tax created by the Federal Insurance Contributions Act. Employers and employees each pay 6.2 percent of wages, with a cap on the amount of wages subject to the tax ($168,600 for 2024, adjusted annually for growth in economy-wide wages).3 Self-employed pay both the employee and the employer share of the tax. Those revenues are credited to the OASI and DI trust funds, which keep track of the programs’ receipts and expenses.
The programs also receive income from a tax on Social Security benefits paid by higher-income beneficiaries, as well as income generated by the investment of the trust fund reserves in non-marketable U.S. Treasury securities.
https://pgpf.org/article/how-does-social-security-work/