Raising the Taxable Maximum Won’t Save Social Security

On June 9, the Social Security Administration released its annual trustees report, which found that America’s most important support program for seniors is facing an accelerating insolvency crisis. The report specifically noted a three-month forward shift in the anticipated insolvency date to the fourth quarter of 2032, and that the Old-Age and Survivors Insurance (OASI) trust fund reserves dropped 11.5% over the past two years – more than double the rate of decline in last year’s Trustees Report.

Since then, Americans have been treated to plenty of fearmongering from the corporate media as well as a steady stream of analyses examining potential fixes to stave off what would be a catastrophic disaster for the one in five Americans who rely on Social Security.

The most noteworthy such proposal to date comes from Sens. Elizabeth Warren (D-MA) and Bernie Moreno (R-OH). In a June 23 op-ed for The New York Times, this unlikely pair proposed eliminating the Social Security taxable maximum – the earnings amount subject to the payroll taxation. Currently, this limit is set at $184,500 for 2026, meaning that every dollar workers earn above this threshold is not subject to the 6.2 percent Social Security tax (self-employed individuals pay 12.4 percent).

This proposal is not new, although such bipartisan support for it may be. Eliminating the taxable maximum has been a frequent target of those proposing Social Security reform, often framed as a “fix” for the program’s long-term funding shortfall.

But removing the cap completely would be only a partial solution that puts a band-aid on the problem rather than fixing it. Additional measures are needed to achieve a long-term resolution.

There is a Better Way

AMAC, in its Social Security Guarantee, has developed a 15-point plan to preserve and modernize the program for future generations, and has weighed the merits of eliminating the cap on taxable earnings. Our study concluded that removing the cap and taxing all wages would lead to much of the revenue gain being lost due to the very high benefits paid to high earners. Further, if the additional tax paid by high earners is not included in the benefit calculation, Social Security’s progressive design would be magnified, turning it into more of a welfare program than a retirement program.

There are, of course, other downsides to the elimination of the taxable maximum, not the least of which is that adding 12.4% to the tax burden already shouldered by high earners would likely push the top marginal tax rate for this demographic above 50%. Economists typically equate this level of taxation with a diminished work incentive, a stifling of innovation, and reduced business investment. Less economic activity means less wages, which means less money paid into Social Security.

Given the downside arguments, AMAC favors a measured approach to the taxable maximum matter. Specifically, AMAC’s proposal calls for a series of increases to the factor used to adjust the maximum annually—the National Average Wage Index. This approach would, over time, advance the taxable maximum to a level comparable to that targeted in the 1983 Social Security Amendments. We argue that this would stave off insolvency or a benefit cut without inviting the deleterious effects of a full-scale removal of the taxable maximum all at once.

The Need for a Full Solution is Critical

There is no shortage of proposals for lawmakers to consider in their search for a solution to this daunting problem. In fact, the Social Security Office of the Chief Actuary has recorded and evaluated hundreds of them and has made them available for review on their website. For the most part, though, they represent ad hoc solutions to specific parts of the problem, and not a complete solution to insolvency, as AMAC has sought to provide.

Nevertheless, these formal proposals, in conjunction with many policy revisions being advanced by researchers and public policy organizations (AMAC included), serve as a basis for bipartisan deliberation – something that needs to happen soon to protect Social Security from insolvency. In fact, as pointed out last week by the Bipartisan Policy Center’s Shai Akabas, it’s likely too late to ward off the drastic benefit cut projected for 2032 without intergovernmental financing.

Social Security’s Shrinking Runway

What’s fascinating about this recent focus on Social Security’s dire situation is that this is not a new problem. A quick look back to the beginning of this century confirms that the insolvency issue was expected 25 years ago.

The conclusion section of the 2001 Social Security Trustees Report ended with this: “The trust fund deficits projected for the longer run should be addressed in a timely way to allow for a gradual phasing in of any necessary changes and to provide advance notice so that workers can adjust their plans to take account of those changes. The sooner adjustments are made, the smaller and less abrupt they will have to be. With informed public discussion and timely legislative action, Social Security will continue to play a critical role in the lives of virtually every American” (emphasis added).

But this most recent wave of media interest may have sharpened lawmakers’ focus in Washington, as reflected in comments made during a joint hearing of the House Ways and Means Committee’s Social Security and Work & Welfare subcommittees the day after the report was released. During his exchange with Social Security Commissioner Frank Bisignano, Committee Chair Jason Smith (R-MO) emphasized that “Congress needs to get its act together to address Social Security and the insolvency that’s coming.”

That warning is welcome, but with the program’s “financial cliff” now only about six years away, can we expect concrete action soon? AMAC’s Social Security Guarantee would be a good place to turn to for ready-made solutions that can win support from both parties while protecting seniors’ benefits.