It’s no secret that the Social Security system needs help, and some suggest even life support. The Congressional Research Service (CRS) has released a report on a novel approach: removing the taxable earnings base.
Social Security payroll taxes are imposed on covered earnings up to an annual maximum amount, referred to as the taxable earnings base. In “Social Security: Removing the Taxable Maximum and Long-Term Program Solvency” the CRS writes that “raising or removing the taxable earnings base is one policy change that would increase the revenue of the Social Security program and reduce the projected long-term deficit.”
If the taxable earnings base were removed, the CRS notes, all covered earnings would be subject to the Social Security payroll tax and would be counted in the benefit calculation—which would increase the amount of covered earnings subject to the payroll tax.
No Time to Lose
While it argues that abolishing the taxable earnings base could help the long-term solvency of the Social Security system, the CRS suggests that if such a change is to be implemented, the sooner the better. They note that time blunts the efficacy of such an approach, arguing that the more time that elapses before it is implemented, the shorter the period in which it will be helpful.
The report says that in 2005, the Office of the Chief Actuary (OCACT) estimated that removing the contribution and benefit base starting in 2006 would have reduced the long-range actuarial deficit by 1.82% of taxable payroll; that, the OCACT said, would have erased 95% of the long-range funding shortfall.
During the intervening years between then and now, the CRS says, the projected actuarial deficit of the Social Security system grew, and the percentage of the funding shortfall eliminated under this option became smaller. “In the past decade,” says the CRS, “the estimated percentage of the long-term funding shortfall that would be eliminated by raising or removing the taxable earnings base has generally decreased.”
The CRS further notes that in 2020, the OCACT projected that the 75-year actuarial deficit equaled 3.21% of taxable payroll and that removing the contribution and benefit base starting in 2021 would eliminate just 55% of the funding shortfall. “With a relatively stable increase in tax revenues from removing the contribution and benefit base, the percentage of the funding shortfall eliminated under this option decreased from 65% to 55% based on OCACT’s projections,” says the CRS.
Put another way, says the CRS, the OCACT projected that if the taxable wage base had been abolished in 2006, the trust funds would have been solvent for at least another 38 years (from 2041 to 2079), whereas doing so in 2021 would delay the depletion of the trust funds for only 22 years, from 2035 to 2057.
Another reason for the reduced effect of removing the taxable earnings base is the decrease over time in the ability implement changes to Social Security taxes and benefits over a longer period, which it says would affect more people but to a lesser degree. The CRS cites a 2010 report by the Social Security Advisory Board (SSAB), which noted as more time elapses, the possibility of distributing the cost of making the system solvent across generations would diminish.
The Bottom Line
The Social Security Board of Trustees and the Social Security Advisory Board (SSAB), the CRS warns, “have stated the need to address program solvency ‘sooner rather than later.’”
The CRS points out that the projected 75-year actuarial deficit has increased, which it says is due to a change in valuation period and factors such as changes in assumptions and methods. For example, they say, the projected 75-year actuarial deficit increased by 0.43% of taxable payroll from 2019 to 2020, in part because a large negative annual balance for 2094 was included.
The trustees, the CRS warns, project that the asset reserves held by the trust funds will begin to decline in 2021 and will be gone in 2034. After that, they say, tax revenues are projected to cover 78% of scheduled benefits.
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