October 6 2007
IWF Policy Brief #4: Eliminating the Wage Cap Won't Fix Social Security
Carrie L. Lukas
In a recent op-ed, Senator Barack Obama (D-IL) suggested that policymakers should consider eliminating the wage cap on Social Security payroll taxes in order to solve the program's looming financial crisis.i However, eliminating the wage cap will not meaningfully change Social Security's financial problems, and it would be a significant tax increase on millions of working Americans and small businesses.
Social Security's financial problems stem from its system of financing. Payroll taxes collected from current workers are immediately used to pay benefits. Nothing is saved for future benefits. Due to changes in lifespan and birthrates, there are fewer and fewer workers paying benefits to support each retiree. As a result, in ten years, Social Security taxes won't be enough to pay all promised benefits.
Simply raising taxes or reducing benefits won't fix Social Security's underlying problem. As long as Social Security uses this "pay-as-you-go" system of financing it will always be vulnerable to demographic changes. The only way to make Social Security truly financially secure is to pre-fund future benefits through a system of personal retirement accounts.