Should Social Security Rely Solely on the Payroll Tax?

Alicia H. Munnell
Boston College
TIAA-CREF Institute Fellow

December 2009 |

The Social Security system is facing a long-term financing shortfall. This shortfall can be eliminated only by putting more money into the system and/or by cutting benefits. This Policy Brief explores the question of the appropriate tax, or combination of taxes, to finance Social Security. The payroll tax may be a perfectly reasonable way for current workers to pay for their benefits. The broader issue is whether the whole cost of the Social Security system–the contributions necessary to generate current benefits and the contributions required to make up for giving early participants benefits far in excess of their contributions – should be financed in the same way. We conclude that perhaps a portion of Social Security financing could be transferred from the payroll tax to the income tax. It would mean higher income taxes, but the burden of the “legacy debt” would be borne more broadly.

© 2014 and prior years, Teachers Insurance and Annuity Association - College Retirement Equities Fund (TIAA-CREF), New York, NY 10017