Because wages are projected, on average, to continue to grow faster than prices, payroll taxes paid will increase in the future, adjusted for price inflation. The increase of the payroll tax rate under Option 2 means that workers whose wages grow at the rate of price inflation (and with earnings below the taxable maximum) would pay 9 percent more in payroll tax in 2050 than under current law.

Option 3:
One-Third Benefit Growth Reductions, Two-Thirds Payroll Tax Increases

The committee’s third option restores long-term actuarial balance by cutting benefit-growth rates less and increasing payroll taxes more than under Option 2.

Benefit growth would be slowed by a milder version of progressive indexing than is proposed in Options 1 and 2. Under Option 3 two provisions affect taxes: the current tax rate of 12.4 percent would be raised in stages to 14.5 percent in 2075, and a new, second tier of Social Security payroll taxation would be added to the existing tax. This second tier would tax earnings above the taxable maximum under current law, and—as with the existing Medicare payroll tax—there would be no cap on earnings that are subject to this new tax. The second-tier tax would be imposed at a rate of 2 percent in 2012 (employer and employee combined), and rise to 3 percent in 2060. Unlike the existing Social Security tax, collections under this added tax would not be credited toward a worker’s Social Security benefits. The second-tier tax would move the program’s financing in a progressive direction.26

Benefit Effects

Option 3 would provide higher real benefit levels than Options 1 and 2; see Figure 6-10. In 2050, medium earners would receive an estimated $1,792 monthly under Option 3 (compared with $1,559 under Option 2, for instance). For replacement rates, the pattern under Option 3 is similar to but higher than that under Option 2; see Figure 6-11. They would decrease with earnings and would be lower in 2050 for Option 3 than under current law. For example, in 2050 the replacement rate for medium earners would be 34 percent (compared with 30 percent under Option 2).

Payroll Tax

Under Option 3, all workers would pay higher taxes than under current law or Option 2; see Figure 6-12 (for details, see Appendix C). Because



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