Lifting the Wage Cap to Save Social Security Won’t Just Hurt Higher Earners

Social Security is deep in the throes of a major financial crisis. In the coming years, the program’s incoming payroll tax revenue won’t be enough to keep paying benefits in full.

Social Security can use its trust fund to keep up with benefits for now. But once that fund runs dry, which is expected to happen as soon as 2032, the program may need to reduce benefits to the tune of 22%.

A cut that size could be catastrophic for current and future retirees alike. There are many people who end up retiring on Social Security alone. Losing 22% of their income could render them unable to cover even basic expenses.

The good news is that this isn’t the first time Social Security has faced benefit cuts, and lawmakers have historically intervened to prevent them from happening. There are a number of solutions Congress can implement to stave off cuts between now and 2032.

One solution some lawmakers support is lifting Social Security’s wage cap. But while that might seem like a relatively easy fix, it could end up being more complicated than expected.

Lifting the wage cap may have deep consequences

Social Security’s wage cap determines how much annual income is taxed to fund the program. It’s a number that changes annually, and it currently sits at $184,500. Earnings beyond that point are not subject to Social Security taxes.

Some lawmakers have proposed lifting Social Security’s wage cap, or even getting rid of it entirely, to pump more money into the program. And part of the argument is that doing so only impacts higher earners who can afford to pay more and, in fact, should pay more.

But raising Social Security’s wage cap won’t just have an impact on higher earners. Social Security taxes are split evenly between employees and the companies that employ them.

In other words, that $184,500 wage cap applies to both workers and employers. And if it’s raised, it will burden businesses with higher taxes. That could lead to:

• Reduced worker salaries
• Reduced hiring
• Fewer workplace benefits
• Less corporate spending to make up for higher payroll costs

All of this could have a negative impact on the broad economy. So when Congress debates raising the wage cap, it’s important to recognize that it wouldn’t just mean having higher earners pay more.

There’s another complication

Another issue with raising Social Security’s wage cap is knowing what to do about the program’s maximum monthly benefit.

Just as wages above the cap aren’t taxed for Social Security purposes, they’re also not factored into the program’s benefits formula. So this year, for example, workers don’t get credit for wages above $184,500.

If the wage cap is lifted, Social Security’s maximum benefit will have to be raised to keep things fair. And at that point, it’s unclear what the net financial benefit for the program will be. So while lifting the wage cap is a possible solution lawmakers will choose to pursue, they’ll need to look at the big picture to make sure it’s the right call.

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