The Growth in Social Security Benefits Among the Retirement Age Population from Increases in the Cap on Covered Earnings

Abstract

Analysts have proposed raising the maximum level of earnings subject to the Social Security payroll (the tax max) to improve long-term Social Security Trust Fund solvency. This article investigates how raising the max leads to the leakage of portions of the additional revenue into higher benefit payments. Using Health and Retirement Study data matched to Social Security earnings records, we compare historical payroll payments and benefit amounts for Early Boomers (born 1948–1953) with and benefit simulations had they been subject to the max (adjusted for wage growth) faced by cohorts 12 and 24 years older. We find that 43.2 percent of the additional payroll revenue attributable to max increases affecting Early Boomers relative to taxes paid by the cohort 12 years older leaked into higher benefits. For Early Boomers relative to those 24 years older, we find 53.5 percent leakage.