Increase the Payroll Tax Rate
Employees and employers each currently pay a 6.2 percent tax to Social Security on earnings up to $110,100. Self-employed workers pay both the employer and employee share for a total of 12.4 percent. One option to help close the Social Security funding gap would raise the payroll tax rate for all workers and employers. For instance, on a $50,000 annual salary, increasing the payroll tax to 6.45 percent would increase both the annual employee and employer contribution by $125 each. Changing it to 7.2 percent would increase the annual employee and employer contribution by $500 each. The rate increase could occur gradually or all at once. Increasing the payroll tax rate from 6.2 percent to 6.45 percent immediately is estimated to fill 22 percent of the funding gap. Increasing the payroll tax rate gradually over 20 years on employers and employees from 6.2 percent to 7.2 percent is estimated to fill 64 percent of the funding gap.
PRO: Gradually increasing the Social Security tax rate from 6.2 to 7.2 percent over 20 years makes good sense. Most Americans say they would rather pay more than see Social Security cut. This change — just 50 cents more a week for an average earner — would close just over half of the financing gap. Together with eliminating the earnings cap, it could pay for much-needed improvements and keep Social Security strong for the long-term. (Virginia Reno, National Academy of Social Insurance)
CON: Increasing Social Security’s payroll tax rate is a bad idea that would increase everyone’s taxes, no matter their income. Economists have known for decades that if the cost of employees gets too great, employers will start to replace them with machines or move to locations with lower taxes. Unfortunately, this does not hit all employees equally. Employers are most likely to replace younger workers and those with lower skill levels. (David John, Heritage Foundation)