Pressure is growing in Congress to address the looming Social Security trust fund insolvency by raising payroll tax revenues, with several Republicans signalling a willingness to consider changes traditionally regarded as politically unacceptable.
Projections issued earlier this year indicated that the fund could be exhausted sooner than previously expected. Without action, benefits would face a 22% reduction by 2032, as the programme would be able to pay out only the money received through payroll taxes.
Workers and employers currently each pay a 6.2% Social Security tax on wages up to $184,500 a year. Earnings above that threshold are not subject to the levy, meaning higher earners contribute tax on a smaller proportion of their income than most workers.
Tom Cole, the Republican chairman of the House Appropriations Committee, said he was open to both increasing the tax rate and raising the income threshold.
“We’ve got too many people who say, ‘Well, we have to stay within the current income level or stay at the current tax rate,’” Mr Cole said. “I’m willing to look at the tax rate. I am willing to raise the amount of income through tax.”
He warned that allowing the system to become insolvent would create a greater political problem than taking steps to preserve it.
“And believe me, you’ll have a lot bigger problem if it goes bankrupt than you’ll have keeping it whole, because people will feel cheated,” he said.
Lloyd K. Smucker, another Republican, has also indicated that lifting the income cap could form part of a solution. Mr Smucker is a leading candidate to become the senior Republican on the House Budget Committee in the next Congress.
“You’ll probably have to do something on the payroll half of the money being paid into the system,” he said, adding that lawmakers could not allow benefit reductions to take place in six years.
Proposals to raise Social Security revenue
Senator Bernie Moreno, Republican of Ohio, has backed a plan with Elizabeth Warren, the Democratic senator from Massachusetts, to raise additional revenue through payroll taxes.
The senators said most Americans earn less than $184,500, so their entire income is subject to the tax, while the highest earners pay it on only part of theirs. They asked: “Why should a middle-class nurse pay a larger share of her paycheck than a wealthy corporate lawyer?”
Their proposal would remove the income cap. A Peter G. Peterson Foundation estimate cited by the senators suggested that this could raise about $3 trillion for Social Security over a decade.
Josh Turek, a Democratic candidate for Iowa’s Senate seat, has also called for the cap to be abolished. He said wealthy people “pay Social Security tax for the first few minutes of the year, but we have teachers… that are paying year-round.”
Removing the cap would cover more than half of Social Security’s funding shortfall, according to the Committee for a Responsible Federal Budget, but would not eliminate the gap entirely.
Other Democrats have proposed increasing the threshold to $400,000 rather than removing it altogether. The plan from Senator Sheldon Whitehouse and Representative Brendan Boyle would also apply the levy to investment earnings.
Alternative plan would rely on borrowing and investment returns
Senators Bill Cassidy, Republican of Louisiana, and Tim Kaine, Democrat of Virginia, have put forward a different approach that would maintain current benefits without increasing taxes.
The proposal would involve borrowing $1.5 trillion to create a fund invested in stocks and other risk assets. It would also require a further $25.1 trillion in borrowing over 75 years to cover the difference between Social Security’s income and its payouts.
Returns from the investment fund would then be used to repay the total of $26.6 trillion in new borrowing. The plan assumes that long-term stock market returns would outperform Treasury bonds.
However, simulations by Boston College’s Center for Retirement Research found that the strategy would not always succeed because investment returns are volatile.
“After incorporating the volatility in equity returns, however, the results show that the gamble does not always pay off,” the report’s authors, Anqi Chen, Alicia Munnell and Jean-Pierre Aubry, wrote.
