In 1983, a commission chaired by Alan Greenspan recommended a number of changes to Social Security. The changes enacted under President Reagan put Social Security on a sound footing for the subsequent decades. At that time, Social Security collected payroll taxes on 90 percent of wages and salaries. By 2004, this ratio had dropped to 84.9 percent as high-wage earners saw above average wage increases that led to more of their money moving beyond the cap above which earnings are no longer subject to Social Security taxation, currently $90,000. Thus, because a small number of high-wage earners have experienced above average wage growth, they effectively receive a hidden tax cut.
A closer look at the data shows:
Rising earnings inequality accounts for half of Social Security’s shortfall. That is, had earnings inequality remained the same since 1983, such that a constant share of wages and salaries – 90 percent – had been subject to Social Security taxation, Social Security’s shortfall would be 47.7 percent smaller.
If the cap is raised immediately, Social Security’s solvency would improve markedly. An increase to 90 percent of wages and salaries would reduce Social Security’s shortfall by 35.4 percent, while the complete elimination of the cap would make Social Security solvent for the next 75 years.
Raising or eliminating the cap would restore tax fairness for Social Security. In 2002 – the last year for which data are available – 5.4 percent of taxpayers earned more than the Social Security cap. While the share of taxpayers with earnings above the cap has declined, the share of earnings above the cap has grown.
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