Eliminating the payroll tax ceiling doesn’t raise sufficient revenue to expand benefits.

A core element of Bernie Sanders's Social Security plan — and indeed all progressive reform proposals — is eliminating the limit on earnings used to levy taxes and calculate benefits. Since Social Security's creation in 1935, both payroll taxes and benefits have been calculated on earnings up to a "cap." Currently, individuals pay taxes on their first $127,200 in earnings, and those same earnings are plugged into Social Security's benefit formula to calculate the benefits they will receive in retirement. Eliminating the payroll-tax ceiling would, all other things being equal, increase the effective top marginal tax rate on earned income by 12.4 percentage points as well as raise the benefits paid to high earners once they retire.

The payroll-tax ceiling was put in place at Social Security's origin for a reason: It established Social Security as a social-insurance program, in which everyone paid taxes and received benefits in some reasonable proportion, rather than a "welfare" program in which most taxes are paid by one group while most benefits are received by another. In fact, the Committee on Economic Security appointed by Franklin Roosevelt to draft his Social Security plan recommended that individuals earning above $3,000 — about $145,000 in terms of today's wage distribution — be exempt from Social Security taxes and not participate in the program. That is, the committee recommended that Social Security contain no redistribution from very high earners to lower earners.

While Congress chose to include high earners in Social Security, the cap on earnings subject to payroll taxes reflected Roosevelt's intent that Social Security resemble a mandatory individual-savings program, with a supplement to low earners, rather than a welfare program transferring resources wholesale from rich to poor. The fact that Social Security is seen as an "earned" benefit rather than a handout is central to the program's continuing political strength. It is ironic that the progressive left, which holds that the very rich have disproportionate power in Washington, D.C., wishes to enact tax increases that, for the first time, would give the very rich a strong reason to oppose the Social Security program.

Beyond changing the character of the program, there are other practical problems with eliminating the Social Security payroll-tax ceiling. To begin, while eliminating the ceiling would raise Social Security's annual revenues by more than 1% of GDP, doing so would address only 40% to 70% of the long-term program deficit, depending upon whether one puts greater stock in the Social Security Trustees' or the CBO's projections. Based on the CBO's projections, eliminating the payroll-tax celling would delay Social Security's trust-fund insolvency date by only a decade to 2039. Even if, as Sanders recommends, we eliminated the payroll-tax ceiling and paid no additional benefits to high earners, that would not be sufficient to make Social Security solvent.

Moreover, even these figures may be optimistic. Both the SSA and CBO assume, in their scoring of proposals to eliminate the taxable limit, that employers would reduce the wages they pay employees to cover the employers' increased payroll-tax liability. That's a fairly standard reading of how the costs of employee benefits are borne. What the budget scorekeepers don't note, however, is how this wage reduction would affect other tax revenues, namely federal and state income taxes and federal Medicare payroll taxes. When employee wages are reduced, governments collect lower taxes on those wages. In a 2006 study, economists Emmanuel Saez and Jeffrey Liebman estimated that the reduction in federal and state income-tax and Medicare-tax revenues would reduce the net revenues from eliminating the tax cap by about 20%. Since 2006, the top marginal federal tax rate on earned income has risen by five percentage points, according to the OECD, which implies that the non-Social Security revenue loss associated with eliminating the payroll-tax ceiling would cut about 25% from the gross Social Security revenue increase.

Furthermore, the figures above take no account of the behavioral effects of higher taxes. Using what Saez and Liebman take to be a middle-of-the-road estimate for the way taxable income responds to changes in tax rates, total revenues raised by eliminating the payroll-tax ceiling would be only about half of what is projected using the SSA or CBO static projections, or even less using today's higher marginal income- and payroll-tax rates. And recall that these are not the writings of supply-side economists; Saez, in particular, is a darling of the left for his work analyzing income inequality and advocating for higher taxes, while Liebman served in a top budget job in the Obama administration. In simple terms, eliminating the payroll-tax ceiling would not be nearly sufficient to pay currently promised Social Security benefits, much less increase them, while non-Social Security revenues would fall significantly due to income shifting and behavioral effects. This is no recipe for a larger Social Security program or a healthier federal budget.