Social security payroll taxes are levied on covered income up to an annual maximum amount, the taxable income base. In “Social Security: Removal the Taxable Maximum and Long-Term Program Solvency,” the CRS writes that “increasing or removing the taxable profit base is a policy change that would increase the revenue of the Social Security program and reduce the projected deficit in the long run.” .”
If the taxable income base were removed, the CRS notes, all covered income would be subject to Social Security payroll tax and would be included in the calculation of the distribution, increasing the amount of covered income subject to payroll tax.
No time to lose
While it argues that abolishing the taxable profit base could improve the long-term solvency of the social security system, the CRS suggests that if such a change needs to be made, the sooner the better. They note that time weakens the effectiveness of such an approach, arguing that the more time that passes before it is implemented, the shorter the period in which it will be useful.
The report says that in 2005 the Office of the Chief Actuary (OCACT) estimated that removing the premium and benefit base from 2006 would have reduced the long-term actuarial deficit by 1.82% of taxable payroll; that, the OCACT said, would have eliminated 95% of the long-term financing gap.
In the intervening years between then and now, the CRS says, the expected actuarial deficit of the social security system grew and the percentage of the funding gap that was eliminated with this option narrowed. “Over the past decade,” says the CRS, “the estimated percentage of the long-term funding gap that would be eliminated by increasing or deleting the taxable profit base has generally declined.”
The CRS further notes that in 2020, the OCACT predicted that the 75-year actuarial deficit was equal to 3.21% of the taxable payroll and that removing the premium and benefit base from 2021 would only eliminate 55% of the funding gap. “With a relatively stable increase in tax revenues from the removal of the premium and benefit base, the percentage of the funding gap that was eliminated under this option decreased from 65% to 55% based on OCACT projections,” the CRS says.
Put another way, the CRS says, the OCACT predicted that if the taxable wage base had been abolished in 2006, the trust funds would have been solvent for at least another 38 years (2041 to 2079), while in 2021 this would slow the depletion of the trust funds for only 22 years, from 2035 to 2057.
Another reason for the diminished effect of removing the taxable income base is the decline over time in the ability to make changes in Social Security taxes and benefits over a longer period of time, which it says would affect more people. , but to a lesser extent. The CRS cites a 2010 report from the Social Security Advisory Board (SSAB), which noted that as time passes, the ability to distribute the cost of making the system solvent across generations would diminish.
It comes down to
The Social Security Board of Trustees and the Social Security Advisory Board (SSAB), the CRS warns, “have stated the need to address program solvency ‘earlier rather than later’.”
The CRS points out that the expected 75-year actuarial deficit has widened, which it believes is due to a change in the valuation period and factors such as changes in assumptions and methods. For example, they say that the projected 75-year actuarial deficit increased by 0.43% of taxable payroll between 2019 and 2020, in part because a large negative annual balance for 2094 was included.
The trustees, the CRS warn, predict that the trust funds’ asset reserves will begin to decline in 2021 and be gone by 2034. Thereafter, tax revenues are expected to cover 78% of planned distributions.