Committee for a Responsible Federal Budget

How Much of a Payroll Tax Increase Would It Take to Fix Social Security?

Jul 14, 2014 | Social Security| Taxes

Around this time of year, the Social Security Trustees usually issue their report on the status of the program over the next 75 years. In advance of that release, CBO has provided a report to Senate Finance Committee ranking member Orrin Hatch (R-UT) with options for making Social Security solvent over 75 years through payroll tax increases. If no action to address the insolvency is taken, Social Security will see a 23 percent across-the-board benefit cut in the early 2030s. Because CBO's own estimate of Social Security's shortfall is larger than the Trustees', it finds that larger increases would be required to keep Social Security solvent than the Trustees estimate.

Closing the 75-year shortfall through the payroll tax alone would require an immediate 3.54 percentage point increase in the payroll tax rate (to 15.94 percent), compared to the 2.7 percentage point necessary increase projected by the Trustees. CBO also evaluates increases in the cap on income subject to Social Security payroll taxes (the "taxable maximum"), which is currently set at $117,000 for 2014 and increases with average wage growth each year. The cap currently covers 83 percent of wages; raising it to 90 percent would close 30 percent of the funding gap, and eliminating the cap altogether would close 45 percent.

The report also shows that getting to 75-year solvency would require a 2.3 percentage point payroll tax increase in combination with the 90 percent option and a 1.6 percentage point payroll tax increase for the elimination option. There are a number of permutations of these options included in the report, which you can see below.

75-Year Solvency Effect of Different Payroll Tax Options
  Percent of 75-Year Shortfall Closed
Increase payroll tax rate to 15.94% 100%
Increase the taxable maximum to 90% of earnings 30%
Increase the taxable maximum to 90% and raise payroll tax rate to 14.69% 100%
Eliminate the taxable maximum 45%
Eliminate the taxable maximum and raise payroll tax rate to 14.01% 100%
Eliminate the taxable maximum and lower benefit replacement rate for earnings above tax-max 65%
Increase payroll tax rate to 14.4% 60%
Increase payroll tax rate to 14.4% and increase tax-max to 90% 90%
Increase payroll tax rate to 14.4% and eliminate tax-max 115%
Increase payroll tax rate to 16.4% 115%
Increase payroll tax rate to 16.4% and increase tax-max to 90% 155%
Increase payroll tax rate to 16.4% and eliminate tax-max 180%

 Source: CBO

CBO also provides tables showing the additional payroll tax burden for different incomes and how replacement rates and lifetime payroll taxes would change for different earners and birth cohorts. The report gives a lot of helpful information on how much it would take to restore solvency and what those options would mean for workers' payroll tax payments. Of course, options to fully restore solvency will only grow larger the longer policymakers wait to act on Social Security.