Can Social Security’s Shortfall Be Closed Simply by Raising Taxes on or Means-Testing Benefits for the Wealthy?
Increasing the amount of wages subject to Social Security payroll taxes from the current $118,500 cap would raise more revenue and improve the financial state of the program. However, this change alone would not solve the problem. The Social Security Chief Actuary recently estimated that eliminating the cap on taxable earnings while preserving the current benefit structure would close only two-thirds of the 75-year shortfall and one-third of the shortfall in the 75th year. CBO estimated this change would close less than half of the 75-year shortfall and much less in the 75th year.
Part of the reason that increasing or eliminating the cap on wages will not eliminate the shortfalls facing Social Security is because a portion of the increased revenues would go to finance higher benefits for wealthy individuals when they retire.
Even lifting the tax cap without giving higher-earning individuals additional benefits would fail to make the program solvent – closing only four fifths percent of the 75-year gap and half of the 75th year gap according to the Chief Actuary (and much less according to CBO).
Means-testing benefits for higher earners would also be insufficient to close Social Security’s 75-year shortfall. As one example, fully eliminating additional benefits for average yearly lifetime earnings above $60,000 would close less than one-fifth of the program’s 75-year shortfall. Means-testing benefits based on current earnings so that seniors making above $180,000 receive no benefits would close a similar portion of the shortfall.