Over the weekend, Senator Bernie Sanders advocated for a major payroll tax increase, as well as a proposal to significantly expand Social Security benefits. The Vermont Senator stated:
“As the next chair of the Social Security Subcommittee, a top priority will be to expand Social Security benefits by at least $2,400 a year & extend Social Security’s solvency for generations.
How? By scrapping the cap & demanding that the wealthy pay their fair share of taxes.”
First, it’s important to take stock of where things currently stand with Social Security and, particularly, its long-term funding problems. Notice that Sanders isn’t pitching a payroll tax hike to solve the massive funding shortfall that will lead to automatic benefit cuts under current law in just 6 years. His proposal is instead focused on expanding the existing problem, demonstrating just how unserious he is about the long-term viability of the program.
Social Security currently has a $29.3 trillion funding gap in present value, according to the 2026 Social Security Trustees Report. The program has been in deficit since 2010, and the balance of treasury securities (IOU’s backed by the government) will be depleted in 2032.
In revenue terms, Sander’s proposal would close some of that $29.3 trillion, but only partially, and the program would remain in deficit. This is essentially kicking the can a little further down the road rather than actually dealing with the underlying problem of unsustainable benefit spending.
To be precise, uncapping payroll taxes on all income would close just under 40 percent of the long-term financing gap by raising taxation of payroll income by 19 percent in the first year, and by 24 percent in the long-run. This very large tax increase on workers would extend the program’s lifeline by, at most, 25 years–not quite the “solvency for generations” that Sanders promises.
However, these revenue estimates overlook Sanders priorities on the spending side. For example, his proposal to revise the cost of living adjustment (COLA) to CPI for the elderly (CPI-E), making benefits more generous, would raise program costs to almost 21 percent of taxable payroll by 2085. This would also bring trust fund depletion forward.
Sanders also proposes gradually increasing the first primary insurance amount (PIA) bend point in each year so that it is 15 percent higher for those newly eligible. This raises long term costs by more than 4 percent and deteriorates the actual balance by 0.41 percent of taxable payroll.
Another of his recommendations involves an approximate $250 increase in PIA for most workers newly eligible for retirement or disability benefits. This would raise long term program costs by about 9 percent, worsening the actual balance by 1.56 percent, and bringing reserve depletion forward by at least 3 years.
All of this is before we fully account for his additional proposal of expanding “Social Security benefits by at least $2,400 a year”.
Again, these proposals demonstrate that Sanders is not serious about the long term viability of the Social Security program. He seems more concerned with prioritizing unfunded benefit expansions to seniors because it is easier and more politically convenient than dealing with the real underlying drivers of program insolvency.
Ultimately, Social Security’s challenges reflect a demographic reality that tax increases alone cannot solve. An aging population means that a shrinking share of workers must finance benefits for a growing number of retirees. Raising taxes on high earners may postpone difficult choices, but it does not eliminate the underlying mismatch between promised benefits and the resources available to fund them.
The proposal to remove the payroll tax cap involves breaking the link between what people pay into the system and what they get out of it. That’s a major shift in the nature of Social Security from a contributory program to something more like a welfare benefit. If we lift the tax cap but not the benefit cap, we’re asking top earners to subsidize the system without receiving additional benefits. That change in design is both politically and philosophically contentious.
To make matters worse, the actuarial projections largely assume that taxpayers continue working, investing, and reporting income much as they do today. In reality, significantly higher marginal tax rates tend to alter behavior. The projections by the trustees report are also likely too optimistic. For example, they assume higher birth rates in the coming decades than both the Census Bureau and the Congressional Budget Office do.
Then there is the marginal tax burden placed on workers. High earners in states like California and New York would face top marginal tax rates well in excess of 60 percent if the payroll tax cap is lifted. This would have significant effects on changes in work effort, compensation structure, timing of income, tax planning, and other legal forms of avoidance.
Another important question for policymakers is, if they are willing to use all of their available tax-raising abilities to push Social Security insolvency back by a decade or two, how do they plan to solve the significantly larger Medicare funding gap? The Medicare funding gap dwarfs the Social Security funding gap with a $65.3 trillion shortfall vs $29.3 trillion for Social Security.
If Sanders and others are willing to push top marginal tax rates over 60 percent to extend Social Securities lifeline (or in Sanders case to fund program expansions), then are they going to push for 70 percent and above tax rates to fund Medicare’s long term costs?
The best macro models suggest that the revenue maximizing top rate of income taxation is close to 40 percent, and that revenue collections start to fall sharply beyond about 50 percent. In other words, there is very little fiscal space left at the top. Pushing the top statutory rate beyond current levels produces only trivially small increases in total government revenue, on the order of a few tenths of a percent of GDP once you account for all federal, state and local taxes.
Sanders’ proposal to eliminate the taxable maximum would be one of the largest tax increases available within the Social Security system, yet it would still leave a substantial portion of the program’s long-term financing gap unresolved. Expanding benefits would absorb part of that revenue, increasing the cost of promises that future workers must finance. Higher marginal tax rates also carry economic costs and leave less room to address Medicare’s financing needs.
Policymakers should prioritize securing existing commitments before making new ones. Durable reform requires confronting benefit growth, demographic pressures, and the limits of the tax base, not simply promising more benefits and sending high earners the bill.
Never enough of other peoples’ money.