Book Description

The Social Security system has been a source of sustenance for the retired and disabled citizens since 1937. The burden on the system has been growing over the years and with the aging U.S. population, the number of citizens over the age of 65 is expected to grow significantly. Economists have suggested several approaches to tackle the issue of insolvency of the Social Security system, one of them being raising the Social Security taxable earnings cap. While the raising of the cap has been a yearly ritual, how effective has it been and what have the impacts of the rising cap been on savings and investment? This paper examines the impact of the rising Social Security taxable earnings cap on savings and investment to assess if the raising of the cap is an appropriate solution to solvency. The results from the macro-level data depict that the impact of raising the taxable earnings cap on personal savings rate and gross domestic investment is insignificant. An investigation of the household level data showed a positive correlation between the savings and the rising taxable earnings cap. Additionally, those with an income in the first quartile are less impacted in terms of saving when compared to high income families. It could be possible that families save more when the cap rises since they may believe that the insolvency of the Social Security system would lead to the Social Security Administrations inability to pay benefits to citizens. In conclusion, I found that the raising of the taxable earnings cap, each year, is a viable solution to solvency and that the Social Security Administration (SSA) is on the path to reinstating financial stability in the Social Security system.