Would Lifting the Taxable Earnings Cap Make Social Security Solvent?

Brief Analyses | Taxes

No. 839
Thursday, November 10, 2016
by Pamela Villarreal

The annual Social Security Trustees report was quietly released in June, but it looked bleak. The Social Security program (including retirement benefits, Disability and Supplemental Security Income) is facing an $11.4 trillion unfunded liability over the next 75 years. The liability increases to $32 trillion into the indefinite future.

What Is an Unfunded Liability? The unfunded liability is the difference between the benefits that have been promised to current and future retirees and what will be collected in dedicated taxes. So fa,r Social Security’s revenue has exceeded its costs, but that will change in 2019, when theT reasury must begin drawing from the Social Security Trust Fund to pay some benefits. The $2.8 trillion Trust Fund is the excess of payroll tax revenues over benefit payments. But no money has been actually set aside and invested.T he excess money is spent on other programs and replaced with government promises ot pay from general revenues. After these IOUs are redeemed by the U.S. Treasury, the Trust Fund will be depleted by 2034. A t that point, Social Security will become insolvent.

The payroll tax rate for Social Security and Disability Insurance (OASDI) is 12.4 percent, split evenly between employees and employers. According to the 2016 Trustees Report, the funding shortfall is equivalent to 2.5 percentage points of taxable payroll from 2016 to 2090. Solvency would require an immediate payroll tax increase of 2.5 percentage points, possibly more. T o extend solvency into the infinite horizon would require an immediate and permanent payroll tax hike of 4 percentage points.

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