Raising Social Security tax cap for high-income earners would help, but not fix, its shrinking reserves

Social Security is facing a financial shortfall that could lead to the program’s inability to pay full benefits to retiring Americans in about a decade. 

The program operates with two trust funds, one which helps support monthly benefit payments to retirees, their spouses and survivors of deceased workers, and one for people with disabilities. 

According to the annual Social Security trustees report released on May 6, the combined trust funds are estimated to be depleted by 2035. Social Security’s retirement trust fund alone is expected to run out in 2033. Once that happens, Social Security checks for retirees are expected to be about 80% of what they would be otherwise.

As many Americans worry about the program’s future, some people like Former Secretary of Labor Robert Reich say the wealthy aren’t paying their fair share in Social Security payroll taxes. Reich and others propose that the government should “scrap” the Social Security “tax cap” to help fix the program’s funding issues. 

Social Security is primarily funded by a dedicated payroll tax that employers and employees pay.

Higher earners don’t pay Social Security payroll taxes on all of their income, though. The current tax law only taxes people on income up to a certain amount, which is known as the “maximum taxable earnings.” This amount increases every year to keep pace with increases in average wages, the Social Security Administration (SSA) explains.

In 2024, that threshold is $168,600. That means people who earn up to $168,600 will pay Social Security payroll taxes on all of their income. But people who make more than $168,600 stop paying into Social Security for any earnings over that amount.

VERIFY looked into whether raising or completely eliminating the Social Security tax cap would help to address the program’s financial shortfall. 

THE QUESTION

Would raising or eliminating the Social Security tax cap help address the program’s funding shortfall?

THE SOURCES

• December 2022 analysis from the Congressional Budget Office (CBO)
• Social Security Administration’s Office of the Chief Actuary
• Richard Johnson, director of the Urban Institute’s Program on Retirement Policy
• Paul Van de Water, senior fellow at the Center on Budget and Policy Priorities specializing in Medicare, Social Security and health coverage issues
• Emerson Sprick, associate director for the Bipartisan Policy Center’s Economic Policy Program

THE ANSWER

Yes, raising or eliminating the Social Security tax cap would help address the program’s funding shortfall, but these changes wouldn’t fix it entirely. 

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WHAT WE FOUND

Raising or eliminating Social Security’s tax cap would extend the life of the program’s combined trust fund, meaning retirees would receive full Social Security payouts longer than currently estimated. But the trust fund would still eventually run out of money. 

Social Security is facing a long-term funding problem because it’s collecting less revenue than it pays out in benefits. That’s because for each person getting Social Security benefits, there are fewer workers paying into the program than in past years as the nation’s population ages and more Baby Boomers retire, the Peter G. Peterson Foundation explains.

When this happens, the program has to tap into trust fund reserves to help cover the cost of monthly benefit payments. But Social Security has long warned that, without action from Congress, the trust funds will eventually run out of cash reserves, which means the program won’t have enough money to pay full benefits.

Raising or eliminating Social Security’s “tax cap” would help address the funding shortfall by generating more revenue, but these changes alone wouldn’t get rid of the shortfall entirely, experts told VERIFY. 

“Eliminating the payroll tax max or raising it substantially…would go a long way toward fixing Social Security’s financing problems, but it would not in and of itself eliminate the problem. We would still have a long-term deficit,” Richard Johnson, director of the Urban Institute’s Program on Retirement Policy, said. 

Paul Van de Water, a senior fellow at the Center on Budget and Policy Priorities, agrees. He said proposals to eliminate or raise the tax cap could “make a substantial contribution to dealing with Social Security’s financing shortfall,” but they are not complete solutions in and of themselves.

Social Security is primarily funded through a dedicated payroll tax, which is deducted from every paycheck you receive. Employers also pay Social Security payroll taxes. 

But over the years, the percentage of workers’ earnings that is subject to Social Security payroll taxes has fallen “because earnings for the highest-paid workers have grown faster than average earnings,” the nonpartisan Congressional Budget Office (CBO) explains. 

In 1983, 90% of all earnings were subject to Social Security payroll taxes. That number fell to 83% in 2020, according to the CBO.

If the program is going to keep paying out benefits at its current level, it needs to receive more revenue. 

We explain what raising or eliminating the tax cap could do for Social Security’s funding. 

Raising the tax cap

One proposal to raise the tax cap would apply payroll taxes to people making more than $250,000 a year without raising benefit payouts. 

For example, in 2024, that would mean a person making $300,000 would pay Social Security payroll taxes on the first $168,600 of their income. They would also pay taxes on income over $250,000 – so, in this case, the additional $50,000 in earnings from $250,000 to $300,000.

In a December 2022 analysis, the CBO said that option would keep the combined Social Security trust fund funded through 2046. 

The Social Security Administration’s Office of the Chief Actuary, which provides estimates on how a range of proposals could help shore up the program’s finances, evaluated the same option. It said a proposal that would apply payroll taxes to earnings above $250,000 starting in 2024 would close about 68% of Social Security’s long-term deficit and extend the life of the combined trust fund through the late 2050s.

The SSA and CBO estimates differ because the two agencies use different formulas, Johnson said. But both found that this proposal would extend the life of the combined trust fund.

Another proposal would apply payroll taxes to income over $400,000 a year without raising benefit payouts. Using 2024 as an example, this would mean all earnings up to $168,600 would be taxed, as well as earnings above $400,000. 

The Social Security actuary’s office estimated this would close about 63% of Social Security’s long-term deficit and extend the life of the combined trust fund through the mid-2040s. 

Eliminating the tax cap

The actuary’s office also looked at the impact of a proposal to completely eliminate Social Security’s taxable maximum without providing increased benefit payouts. That means people would pay Social Security payroll taxes on every dollar of their earnings, regardless of how much they make. 

It estimates that this would close about 70% of the shortfall and extend the trust fund’s life to about 2060. 

But, as these estimates show, making changes to the tax cap wouldn’t fix all of Social Security’s funding issues. That’s why Emerson Sprick, associate director for the Bipartisan Policy Center’s Economic Policy Program, says increasing the taxable maximum isn’t a “silver bullet” and instead needs to be part of a “comprehensive package of Social Security reforms.” 

Other changes could include raising the payroll tax rate and making adjustments to Social Security benefit payouts, Sprick and Johnson said.