CEPR

For Immediate Release: February 13, 2019
Contact: Karen Conner, (202) 293-5380 x117, This email address is being protected from spambots. You need JavaScript enabled to view it.

Social Security payroll taxes only apply to wages under $132,900 in 2019, effectively giving high-wage earners a lower tax rate. Modifying or eliminating this cap would strengthen the program and redress the impact of growing income inequality on the program’s finances.

Who Pays if We Modify the Social Security Payroll Tax Cap?, by Alan Barber and Hayley Brown, published today by the Center for Economic and Policy Research (CEPR), focuses on legislative proposals to redefine the payroll tax cap. Such proposals would have a significant impact on the program’s projected shortfall after 2034.

Sen. Bernie Sanders and Rep. Peter Defazio today reintroduced their bill from 2018 that applies the payroll tax to income above $250,000, including unearned income. Under this proposal, earnings under the current cap of $132,900 would still be subject to the payroll tax, but there would be no payroll tax on earnings above the cap until earnings reach $250,000.

Another recent proposal comes from Rep. John Larson, the Social Security 2100 Act, making earnings in excess of $400,000 subject to payroll taxes.

Sen. Patty Murray’s proposal, introduced in the 115th Congress, would impose a surtax of 2.0 percent on employers and employees if the employee’s earnings are above $400,000, and a surtax of 4.0 percent if an individual with earnings above that threshold is self-employed.

CEPR economist Dean Baker writes that, over time, Social Security benefits have been shrinking, relative to earnings. “This reduction in benefits has not been widely noted because it takes the form of an increase in the age at which workers can receive their full benefits,” says Baker.

Baker’s proposal, explained here, “would be to change the basic formula for calculating benefits. The benefit formula is somewhat complicated, but it is structured as a progressive payback formula based on workers’ average income over their working lifetime.”

The current regressive nature of the Social Security payroll tax cap is put into sharp focus around Valentine’s Day each year. That’s about the time someone making $1,000,000 will have stopped paying into Social Security for the year. As CEPR’s Kevin Cashman writes, in 2019, the actual date is February 18th, and his accompanying calculator can show the last day when various salaries, if spread evenly throughout the year, are subject to Social Security taxes. Try it with your favorite millionaire.

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