Taxing all earnings might have the effect of reducing the broad support for Social Security that exists now, because higher income earners would receive such small benefits in relationship to their contributions. Without broad support, Social Security, over time, could turn into a welfare-like program.

27.2 What would be the impact of raising the amount of earned income which a Social Security recipient can earn and still receive benefits?

This would increase benefit outgo in the short range, but would have little long- range cost affect (because the larger benefits for delayed retirement would no longer be as much).

27.3 If the cap is removed, and we decreased the contribution rate, would that help maintain the Social Security system?

If both actions were taken, the financial status of the system would not be greatly affected. However, if only the cap were removed, the financial status would be significantly improved.

27.4 Why are retired people restricted in their earnings after retirement? We are still contributing into the Social Security system. Why not take off the restriction so we can earn and contribute more?

The theory is that retirement benefits should be paid only to people who are substantially retired. However, it is important to note that, when benefits are withheld because of earnings, the benefits payable later when the person is retired will be equitably higher.

27.5 What would happen if we taxed all income and removed the limit of $68,400 per year?

If the income cap on Social Security contributions were eliminated (but the current $68,400 cap retained for benefit calculations), the actuaries estimate that 91% of the financing shortfall would be eliminated.

27.6 Why not tax all earnings rather than have a ceiling?

And

Why aren't all wage earners required to pay the tax on all, or why are some required to pay a higher percentage of their income than is taxed now? Why is there a $68,400 cap? Is the answer that wealthier have more political clout?

Taxing all earnings might have the effect of reducing the broad-based support for Social Security that exists now because higher income earners would receive such small benefits in relationship to their contributions. Without broad support, Social Security over time could turn into a welfare-like program.

27.7 Should we consider the impact of corporate policies that favor part-time employees who are denied medical/pension benefits or downsize by shipping jobs offshore, thereby reducing the wage bases for FICA taxation?

The actuaries do attempt to build these types of economic changes into their projections.

27.8 What would be the effect of applying the payroll tax, without cap, to capital gains?

SSA has never assessed the potential effect on the trust funds of taxing capital gains, and the study of such a proposal would probably be conducted by the Department of Treasury. However, let us give you some background information on this issue.

Both employees and employers paid a Social Security payroll tax 7.65% on earnings up to $68,400 in 1998. (The earnings amount is adjusted each year.) Since capital gains are unearned income, they are not subject to Social Security payroll taxes. From the standpoint of program philosophy, we have always said workers should supplement Social Security benefits with savings, pensions and investments. To further tax capital gains would be inconsistent with encouraging savings and investments.

27.9How much money would be raised for Social Security if the minimum wage were raised to $8.00 per hour?

If the minimum wage were raised from its present level of $5.15 per hour to a new level of $8 per hour, the trust funds would almost certainly initially experience an increase in tax receipts. However, this 55 percent increase in the 'wage rate for the lowest-paid workers would elicit a response from employers affected by the sharp increase in the cost of doing business. Employers could:

Reduce the amount of non-wage compensation--"fringe benefits," such as health insurance and pension contributions--received by their employees. Since low-paid employees receive few fringe benefits, the increased cost could not be offset by this employer response;

Attempt to increase prices. If the Federal Reserve did not accommodate this inflation, real output would fall, causing total wages and Social Security taxes to fall as well. If the Federal Reserve did accommodate the inflation, Social Security benefits would be higher, offsetting at least partially the increased revenue; or

27.10 Are there any considerations for raising the earned income cap on Social Security taxes?

This had been proposed.

27.11 Why tax only wages? What about other income?

Only wages and other earned income are counted, because Social Security is an income replacement program in the event of retirement, disability, or death.

27.12 If an income cap wasn't required for the Federal income tax to ensure citizen buy in, why was it considered necessary for the Social Security? Why not consider a progressive Social Security tax like the Federal income tax?

The cap on earnings that are subject to Social Security taxes also caps the earnings that are counted toward Social Security benefits. The cap reflects the idea that Social Security should replace earnings only up to a certain level.

While the Social Security tax is not progressive -- the benefits are progressive in several ways. The benefit formula pays higher percentage replacement to low earners than to high earners. And family benefits are available to young children of workers who die or become disabled, and to widowed spouses in old age.

27.13 Will eliminating the income cap on earnings improve the dollar shortfall by 2029?

Eliminating the base - and paying benefits on the newly taxed earnings, a major issue - would eliminate about two-thirds of the 75-year deficit.

27.14 How high would the wage base have to be increased to cover 95% of wages?

There are two ways of looking at this. Using the assumptions of the Social Security trustees, to have 95 percent of all workers have all of their wages covered, the base in 1998 would have to be $73,200. (With the current 1998 base of $68,400, 94 percent of all workers have all of their wages covered by Social Security.) However, to have 95 percent of all U.S. wages covered, the base would have to be $200,400.