Social Security Actuaries: Raising the Cap Is Not a Permanent Solution

October 27, 2003

The Social Security Administration last week published a memorandum on an analysis on the effects of increasing the maximum taxable Social Security wages. Several opponents of individual accounts have suggested to raise or eliminate this cap thereby adding years to the system's solvency. However, the results of the analysis conclude that eliminating the cap is not a permanent solution. Thus, individual accounts remain the only actuarially scored solution that promise to bring Social Security to solvency.

The memo provides analysis of two proposals.

Under Proposal 1: "the contribution and benefit base would be eliminated for earnings in years after 2003, for both the purpose of computing payroll tax and for setting limits on the amount of earnings credited in OASDI benefit computations. For example, a worker with covered earnings of $200,000 in 2004 would pay employee payroll taxes of $12,400 (more than double the amount under current law, with a similar increase for the employer), but would also be credited the total $200,000 as 2004 earnings when determining OASDI benefits. The worker's benefits would be higher than under present law."

The memo estimates that the financial effect of such proposal would delay permanent cash deficits by only six years—from 2018 to 2024. In 2078, the increased revenue would still only be enough to fund 74 percent of promised benefits.

Under Proposal 2: "the contribution and benefit base would become a benefit base only. The base would be eliminated for the purpose of computing payroll tax, but would continue to be used to set limits on the amount of earnings credited in OASDI benefit computations. For example, a worker with covered earnings of $200,000 in 2004 would pay employee payroll taxes of $12,400 (more than double the amount under current law, with a similar increase for the employer), but would only be able to credit about $87,900 as 2004 earnings when determining OASDI benefits. The worker's benefits would be the same as under present law."

This alternate proposal eliminates the cap on taxable wages and, further, denies any benefits based on these additional contributions. Such measures would alter the relationship between contributions and benefits for high-income earners. Essentially, Social Security would no longer resemble a contributory insurance system. Even under this "stick it to the rich" proposal, permanent cash deficits would begin in 2025— delayed 7 years.

While both proposals extend Social Security's insolvency date, eliminating the wage cap is by no means a permanent solution. As the memo states, under both proposals, the trust fund ratio is decreasing at the end of the long-range period.

Thus, certain individual account proposals for Social Security remain to date the only actuarially sound solution to permanent solvency.

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