by Bruce Webb
I haven’t posted on Social Security for a while for a pretty simple reason. Nothing has been going on. Until today when Social Security released the following Policy Brief: Distributional Effects of Raising the Social Security Taxable Maximum.
This policy brief analyzes the effects on taxpayers and Social Security beneficiaries of either eliminating the taxable maximum (tax max) for Social Security or raising it to a level so that 90 percent of all Old-Age, Survivors, and Disability Insurance (OASDI)–covered earnings would be subject to the payroll tax. Under both scenarios it is possible to either calculate benefits based on the current-law tax max (no max and max 90) or to credit the new taxable amounts toward benefits (no max plus benefits and max 90 plus benefits).
Historically Social Security had tapped the top 90% of income. Due to the skewing of income we have seen over the last couple of decades that percentage is down to about 84%. Various plans including LMS and the Obama preliminary plan have suggested adjusting the cap upwards, with or without a donut hole, either to the traditional 90% level or following Medicare with no limit at all. Additionally there has been debate whether this cap increase should be accompanied by additional benefits. This study finally, thankfully puts some numbers in play. Those interested should read the whole thing. The current projected payroll gap is 2.00%. An increase to a 90% level with no increase in benefits, which is in the range of what both LMS and the Obama cap increases propose, fills only about half of the gap. On the other hand extending FICA to all income with no increase in benefits backfills the whole thing. Personally I still favor the Northwest Plan that would leave the capp unchanged, but for those who would like to play mix and match here is your opportunity. (The tables are easier to read in the HTML version, these are copied from the PDF).