Sen. Elizabeth Warren (D–Mass.) has a plan to “save” Social Security from upcoming benefit cuts—and all it will require is sacrificing a huge chunk of the economy via the biggest tax hike in over 40 years.
Is that worth it? Americans ought to be skeptical.
Warren’s plan calls for eliminating the cap on the payroll tax as a way to generate more revenue for Social Security. Right now, Social Security is funded with a 12.4 percent tax on all earnings up to $184,500. Earnings that exceed the cap are not taxed—so, a single worker cannot pay more than $22,878 into Social Security annually.
Warren and her allies—now including some Republicans, like Sen. Bernie Moreno (R–Ohio), who has endorsed the idea—have dressed up this proposal as a way to tax the rich, because it would only affect earnings that exceed the annual cap.
But that’s only half the story.
See, the payroll tax that funds Social Security is split between employees and employers. Each pays half, or 6.2 percent, of the total.
Raising the cap would only require that high-earning workers pay more, that’s true. But Warren’s plan would also raise taxes on any business with employees who earn more than the current cap.
And, of course, it’s not businesses that pay taxes—it is people. Those higher costs created by a massive tax hike would filter down into the economy in a variety of ways. Businesses might hire less, offer fewer raises, charge higher prices for goods and services, provide less value to shareholders, and so on.
Warren is right that Social Security faces a reckoning, but the tradeoffs of her plan should be carefully examined. Uncapping the payroll tax would be the largest tax increase since 1982, according to calculations by the Tax Foundation. Doing so would generate $3.2 trillion over a decade (if the cap were eliminated next year), but just $1.5 trillion after the “negative economic effects” of the plan are factored into the equation, the group estimates.
Those negative economic effects include the loss of an estimated 1.8 million jobs and a 1.5 percent reduction in economic output.
Another consideration is “the opportunity cost,” notes Jessica Riedl, a tax and budget fellow at the Brookings Institution.
“Even liberal economists estimate that additional tax revenues begin leveling off as marginal tax rates reach the high 50s, and they begin losing money at rates somewhere between 60 and 73 percent. This leaves room to raise marginal tax rates on high earners by perhaps 6 to 12 percentage points,” Reidl wrote this week in The Atlantic. “Raising the rich’s rates past that point may provide spiteful satisfaction but could reduce tax revenues, as high earners either stop earning additional wages or shift their compensation to lower-taxed investments or foreign jurisdictions.”
In other words, you could end up past the tipping point where higher taxes actually generate lower revenue. That means Warren’s plan would be risking every other program the government runs in order to “save” Social Security.
And for what? Eliminating the payroll tax cap would not actually fix Social Security’s fiscal problems. It would extend Social Security’s solvency by just 21 years. According to Social Security’s own estimates, eliminating the payroll tax would keep the program out of the red for just four years. Slowing the program’s collapse might be a worthwhile accomplishment in some circumstances, but not when it comes with the massive price tag Warren is proposing.
If you want to get wealthier Americans to fix Social Security, the best bet is to cut or change the program’s benefit structure.
Retirees are, on average, the wealthiest cohort of Americans. Social Security could easily be restructured to aid needy elderly people by eliminating or greatly reducing payments to wealthy retirees. In 2022, for example, the Congressional Budget Office calculated that Social Security’s insolvency could be fixed by giving all seniors a flat monthly payment equal to 150 percent of the federal poverty line—about $1,700 per month or $20,000 per year.
That could be done without raising taxes on businesses and without shrinking the economy. In fact, many estimates show that reducing Social Security benefits would grow the economy, at least marginally, as it would encourage Americans to postpone retirement and stay productive.
Americans should reject Warren’s plan to sacrifice an even larger share of the economy at the altar of Social Security.
