Contents

• Background
• Origin and History of the Taxable Earnings Base
• The Taxable Earnings Base
• The Taxable Earnings Base Today
• The Taxable Earnings Base Over Time
• The Taxable Earnings Base by State
Introduction
• The Taxable Earnings Base by Employment Status and Gender
• Origin and History of the Taxable Earnings Base
• The Taxable Earnings Base by Employment Status and Gender
Over Time
• The Future of the Taxable Earnings Base
• Projections of the Share of the Population EarningWho Have Earned Above the Taxable Wage Base OverEarnings Base at Least Once in Their Lifetime
• Impact of Raising or Eliminating the Taxable Earnings Base
• Impact on Individuals' Lifetime Payroll Taxes and Social Security Benefits ifIf the Taxable WageEarnings Base Were Raised or Eliminated Base Were Eliminated
• Aggregate Changes
• Changes by Income Group
• Changes by Gender
Age
• Impact on the Social Security Trust Funds
• Option 1: Cover 90% of Earnings and Pay Higher1A: Eliminate Taxable Earnings Base, with No Additional Benefits
• Option 2: Cover All Earnings and Pay Higher Benefits
• Option 3: Cover All Earnings and Pay No Additional Benefits
1B: Eliminate Taxable Earnings Base, with Current Benefits Formula
• Option 1C: Eliminate Taxable Earnings Base, with Adjusted Benefits
• Options 2 and 3: Increase Taxable Earnings Base to Cover 90% of Earnings
• Taxes for Earnings Above the Taxable Earnings Base
• Impact on Federal Revenue
• Impact on Workers' and Employers' Behavior
• Arguments For and Against Raising or Eliminating the Base
• Arguments For
• Arguments Against

Summary

Social Security taxes are levied on covered earnings up to a maximum level set each year. In 20102017, this maximum—or what isformally called the contribution and benefit base, and commonly referred to as the taxable earnings base or the taxable maximum—is $127,200—is $106,800. The taxable earnings base serves as both a cap on contributions and a cap on benefits. As a contribution base, it establishes the maximum amount of eacha worker's earnings that is subject to the payroll tax. As a benefit base, it establishes the maximum amount of earnings used to calculate benefits.

Since 1982, the Social Security taxable earnings base has risen at the same rate as average wages in the economy. However, because ofBecause the cap is indexed to the average growth in wages, the share of the population below the cap has remained relatively stable at roughly 94%. However, due to increasing earnings inequality, the percentage of aggregate covered earnings that areis taxable has decreased from 90% in 1982 to 8583% in 2014.

Raising or eliminating the cap on wages that are subject to taxes could reduce the long-range deficit in the Social Security trust funds. For example, phasing in an increase in the maximum taxable earnings to cover 90% of earnings over the next decade would eliminate roughly 30% of the long-range shortfall in Social Security. If all earnings were subject to the payroll tax, but the base was retained for benefit calculations, the Social Security trust funds would remain solvent for over 60 years. However, having different bases for contributions and benefits would weaken the traditional link between the taxes workers pay into the system and the benefits they receive.

Social Security taxes are levied on covered earnings up to a maximum level set each year. In 2017, this maximum—formally called the contribution and benefit base, and commonly referred to as the taxable earnings base or the taxable maximum—is $127,200. The taxable earnings base serves as both a cap on contributions and on benefits. As a contribution base, it establishes the maximum amount of a worker's earnings that is subject to the payroll tax. As a benefit base, it establishes the maximum amount of earnings used to calculate benefits.

Since 1982, the Social Security taxable earnings base has risen at the same rate as average wages in the economy. Because the cap is indexed to the average growth in wages, the share of the population below the cap has remained relatively stable at roughly 94%. However, due to increasing earnings inequality, the percentage of aggregate covered earnings that is taxable has decreased from 90% in 1982 to 83% in 2014% in 2005. The percentage of covered earnings that is taxable is projected to decline to about 83% for 2014 and later. Because the cap was indexed to the average growth in wages, the share of the population below the cap has remained relatively stable at roughly 94%. Of the 9.5 million Americans with earnings above the base, roughly 80% are men and only 9% had any earnings from self-employment income. New Jersey has the highest share of the population above the maximum (11.6%) and South Dakota has the lowest share (2.1%).

CRS estimated the potential impact of eliminating the taxable wage base on future benefits and taxes. If the base were removed in 2013, CRS estimates that by 2035, 21% of beneficiaries would have paid some additional payroll taxes over the course of their lifetimes. However, the average change in taxes and benefits would be small. Looking only at individuals who would pay any additional taxes over the course of their lifetimes, at the median, total lifetime tax payments would rise by 3% and benefits would increase by 2% relative to current law. In general, those in the highest income groups would have the largest changes in both tax payments and in benefits relative to current law.

Raising or eliminating the cap on wages that are subject to taxes could reduce the long-range deficit in the Social Security Trust Funds. For example, if the maximum taxable earnings amount had been raised in 2005 from $90,000 to $150,000—roughly the level needed to cover 90% of all earnings—it would have eliminated roughly 40trust funds. For example, phasing in an increase in the maximum taxable earnings to cover 90% of earnings over the next decade would eliminate roughly 30% of the long-range shortfall in Social Security. If all earnings were subject to the payroll tax, but the base was retained for benefit calculations, the Social Security Trust Fundstrust funds would remain solvent for the next 75over 60 years. However, having different bases for contributions and benefits would weaken the traditional link between the taxes workers pay into the system and the benefits they receive.

This report will be updated as legislative activity warrants.

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Social Security Social Security: Raising or Eliminating the Taxable Earnings Base

Background

Introduction

Since the beginning of the program, Social Security taxes have been levied on covered earnings up to a maximum level set each year, referred to as the taxable earnings base.¹ In 2016, an estimated 171 million workers paid into Social Security via Federal Insurance Contributions Act (FICA) taxes or Self-Employment Contributions Act (SECA) taxes, or both, on their wages and net self-employment income.² Both employers and employees contribute taxes at the FICA rate, and SECA taxes are paid by the self-employed. Both taxes have three components: Old Age and Survivors Insurance (OASI), Disability Insurance (DI), and the Hospital Insurance (HI) part of Medicare. The OASDI (combined OASI and DI) tax is levied on earnings up to $127,200 in 2017. The HI tax is levied on all earnings. By law, the Commissioner of Social Security is required to raise the base whenever an automatic benefit increase—a cost-of-living adjustment (COLA)—is granted to Social Security recipients, assuming wages have risen (e.g., there was no increase in the base from 2015 to 2016 due to no COLA increase for 2016).³

The taxable earnings base limits the amount of wages or self-employment income used to calculate contributions to Social Security. Unlike income taxes, workers who have earnings above the limit, whether they earn $200,000 or $2 million, pay the same dollar amount in Social Security payroll taxes. Under the 2017 limit of $127,200, the maximum amount a wage and salary worker directly contributes to Social Security is $7,886 (the worker's employer contributes an equal amount), whereas a self-employed individual contributes a maximum of $15,772.⁴

The taxable earnings base also limits the annual amount of earnings that are used in benefit calculations and thus sets a ceiling on the amount Social Security pays in benefits. If a worker earned at or above the earnings base for his or her entire career and retired in 2017 at the full retirement age,⁵ his or her annual benefit would be $32,244 ($2,687 per month).⁶ However, very few Americans receive the maximum benefit as it is rare to have had such consistently high earnings over a lifetime.

Table 1. 2017 Social Security and Medicare Tax Rates and Maximum Taxable Earnings, Maximum Taxes Paid, and Maximum Retirement Benefits

FICA and SECA Tax Rates

FICA

SECA^a

5.015%

10.03%

+ Disability Insurance^b

1.185%

2.37%

= Subtotal Social Security (OASDI) tax rate

6.20%

12.40%

+ Hospital Insurance tax rate

1.45%

2.90%

Total FICA and SECA Rates

7.65%

15.30%

+ Employer contribution

7.65%

 

Combined Employee and Employer FICA Tax Rates

15.30%

 

Maximum Taxable Earnings

OASDI

HI

Social Security

$127,200

no maximum

Employee/Employer (each)

$7,886

No limit

Self-employed

$15,772

No limit

Social Security Benefit for 2017 Retiree With Earnings at or Above the Maximum for Entire Career

Monthly

Annual

Retired at full retirement age (66)

$2,687

$32,244

Source: Social Security Administration (SSA), https://www.ssa.gov/news/press/factsheets/colafacts2016.pdf. a. Certain adjustments and income tax deductions apply. b. The payroll taxes directed to OASI and DI was changed for 2016 to 2018, to extend the projected date of DI reserve depletion about six years (P.L. 114-74). The Taxable Earnings Base by Employment Status and Gender According to the Social Security Administration's (SSA's) statistics, a small share of workers earn above the taxable earnings base each year. In 2013, 6% of workers (9.8 million individuals) earned more than the taxable earnings base (Table 2). Most of the individuals earning above the base were men (7.3 million individuals, or roughly 75% of the total). Approximately 9% of all male workers and 3% of all female workers had earnings above the maximum. Most individuals earning above the base were wage and salary workers (roughly 94% of the total). Some 8.1% of individuals who earned above the base were self-employed. ⁷ Table 2. Number and Percentage of Workers with Earnings Above the Taxable Earnings Base of $113,700 by Type of Earnings and Sex, 2013

Group

Number of Workers^a

(in thousands)

Percentage of Workers

(as percentage of)

 

Total

with Earnings Above the Taxable Earnings Base

Workers with Earnings Above Taxable Earnings Base

Workers Within Group

All workers

163,355

9,799

100%

6

.0%

Men

84,838

7,296

74

.5%

8

.6%

Women

78,517

2,513

25

.6%

3

.2%

All wage and salary workers

152,378

9,211

94

.0%

6

.0%

Men

78,462

6,837

69

.8%

8

.7%

Women

73,896

2,375

24

.2%

3

.2%

All self-employed

18,609

790

8

.1%

4

.2%

Men

10,411

631

6

.4%

6

.1%

Women

8,198

158

1

.6%

1

.9%

Source: Social Security Bulletin, Annual Statistical Supplement, 2015, at https://www.ssa.gov/policy/docs/statcomps/supplement/2015/supplement15.pdf. The Congressional Research Service (CRS) calculations based on 2013 estimates from tables, 4.B1, 4.B4, 4.B7, and 4B.9.

Notes: Totals do not necessarily equal the sum of rounded components.

a. Workers with earnings in both wage and salary employment and self-employment are counted in each type of employment but only once in the total. earnings base. Social Security was enacted in 1935, and the Social Security payroll tax was first levied in 1937. From 1937 through 1949, the tax rate was 1% (on employee and employer, each) on earnings up to $3,000 a year. Since that time the rate has risen to 6.2% and the taxable earnings base has been increased to help meet the financing needs of the program, and to keep up to date with changing earnings levels. Since 1982, the Social Security earnings base has risen at the same rate as wages in the economy. By law, the Commissioner of Social Security is required to raise the base whenever an automatic benefit increase—cost of living adjustment (COLA)—is granted to Social Security recipients, assuming wages have risen. The increase in the base from 2009 to in 2010 is based on the increase in average wages from 2007 to 2008.¹

Origin and History of the Taxable Earnings Base

In 1935, the designers of Social Security, President Franklin Roosevelt's Committee on Economic Security, did not recommend a maximum level of taxable earnings in its plan, and the draft bill that President Roosevelt sent to the HillCongress did not include one. The bill emphasized who was to be covered by the system, not how much wages should be taxed. Being in the midst of the Depression, the Administration's attention was on the large number of aged people living in poverty. ItsThe committee's goal in proposing a Social Security program was to complement public assistance measures (Old-Age Assistance) in its plan. ⁸ The plan offered immediate cash aid to the aged poor and created an earnings-replacement system intended to lessen the need for welfare benefits in the long run. It was recognized that the new system would not be sufficient to provide full income in retirement, but would provide a "core" benefit as a floor of protection against poverty. Not concerned about high-income retirees, the Administration's proposal exempted non-manual workers earning $250 or more a month from coverage (i.e., $3,000 on an annual basis)($3,000 a year) from coverage. Manual workers were to be covered regardless of their earnings, but few had earnings above this level.

It was the Social Security bill reported by the House Ways and Means Committee that clearly established a maximum taxable amount, which itthe bill set at $3,000 per year.²9 In addition, the committee dropped the exemption for non-manual workers with high earnings. The committee's report and floor statements made at the time give no clear record as to the reasoning for the taxable limit, but concerns about tax equity and attaining as much program coverage of the workforce as possible were suggested as factors for rejecting the high-earner exemption. Not covering themhigh earners meant that they would not pay the tax wherewhile lower-wage earners would, and coverage would be erratic for workers whose earnings fluctuated above and below the $250 monthly threshold.

Although tax policy concerns were raised in later years, with a higher base preferred by those seeking a more proportional tax system, there was little, if any, serious attention given to eliminating the base entirely. In the late 1940s and early 1950s, and to a lesser extent later on, the major arguments were overconcerned the base's size and how it affected the development of Social Security. A larger base meant that more earnings would be credited to a person's Social Security record and would lead to higher benefits (sincebecause benefits are based on a worker's contribution into the system via taxes on earnings). Proponents argued that the base needed to be raised to reflect wage or price growth so that the benefits of recipients, in particular moderate and well-to-do recipients, would not erode over time, (thereby preserving their support for the system)..¹⁰ Critics argued that this would increase benefits for people who could save on their own while making saving by private means more difficult. In 1972, as a means of financing COLAs for Social Security recipients, procedures were enacted that increased the base automatically to reflect the growth in average wages. In 1977, the base was raised beyond what resulted from the automatic increase provision (by $7,500 over three years) as a means of raising revenue to help shore up the program's ailing financial condition. These ad hoc adjustments were intended to achieve a base under which 90% of all covered payroll would be subject to tax.

Medicare was enacted in 1965 with the hospital insurance (HI) portion of the program financed with11

Prior to 1974, increases to the taxable earnings bases were specifically legislated on an ad hoc basis. However, a period of large increases to the cost of living (e.g., 5.5% in 1970) led to concerns that such a rise in the cost of living would reduce the purchasing power of Social Security benefits, and that ad hoc increases might be insufficient.¹² President Nixon had recommended automatic adjustments to benefits in 1969, but efforts in 1970 and 1971 to incorporate automatic adjustments failed. This changed in 1972, when H.R. 1 (which would eventually become the Social Security Amendments of 1972; P.L. 92-603) gained traction. The bill included a COLA provision, but this provision, along with some others, split off from the main text, and was enacted under P.L. 92-336 instead. P.L. 92-336 included procedures that increased the taxable earnings base automatically as a means of financing COLAs for Social Security recipients, though the adjustment to the taxable earnings base was tied to average wages.¹³

The Social Security Amendments of 1977 (P.L. 95-216) gradually increased the base beyond what resulted from the automatic-adjustment procedures from 1978 to 1981, such that in 1981, the taxable earnings base was $7,500 higher than the "old-law" base.¹⁴ This was done as a means of raising revenue to help shore up the program's ailing financial condition and was intended to achieve a base under which 90% of all covered payroll would be subject to tax (to match the original 1935 act);¹⁵ increases to the taxable earnings base after 1981 returned to automatic-adjustments procedures.

Medicare was enacted in 1965, under the Social Security Amendments of 1965 (P.L. 89-97), with the HI portion of the program financed by payroll taxes. The HI tax was first levied in 1966 at a rate of 0.35% (on employee and employer, each) and the maximum taxable amount was set at the same level as Social Security's.³16 The HI rate was subsequently raised periodically (reaching its current level of 1.45% in 1986) to meet the financing needs of the program. However, its base continued to be the same as Social Security's through 1990. Then, to reduce federal budget deficits, the Omnibus Budget Reconciliation Act of 1990 (P.L. 101-518508) raised the HI base to $125,000. The HI base then rose automatically to $135,000 over the next two years. In 1993, as part of his plan to reduce budget deficits, President Clinton proposed that the HI base be eliminated entirely. As part of; with the Omnibus Budget Reconciliation Act of 1993 (P.L. 103-66), the HI base was removed, raising an estimated $29 billion in revenues over the FY1994-FY1998 period. As there is no maximum taxable earnings amount in Medicare, Medicare financing will not be discussed further in this report.

The Taxable Earnings Base

The Taxable Earnings Base Today

In 2010, an estimated 162 million workers will pay Federal Insurance Contributions Act (FICA) taxes and Self-Employment Contributions Act (SECA) taxes on their wages and net self-employment income.⁴ Both employers and employees contribute earnings at the FICA rate and SECA taxes are paid by the self-employed. Both taxes have three components: Old Age and Survivors Insurance (OASI), Disability Insurance (DI), and the HI part of Medicare. The OASDI tax is levied on earnings up to $106,800 in 2010. The HI tax is levied on all earnings.

The taxable earnings base limits the amount of wages or self-employment income used to calculate contributions to Social Security. Unlike income taxes, workers who have earnings over the limit, whether they earn $110,000 or $1 million, pay the same dollar amount in Social Security payroll taxes. Under the 2010 limit of $106,800, the maximum amount a wage and salary worker contributes to Social Security is $6,622 (his or her employer contribute an equal amount) whereas a self-employed individual contributes a maximum of $13,243.⁵

The taxable earnings base also limits the annual amount of earnings that are used in benefit calculations and thus sets a ceiling on the amount Social Security pays in benefits. For example, the maximum amount of earnings in 2010 used to calculate a worker's benefit is $106,800, regardless of whether the worker earned above that amount. If an individual earned at or above the earnings base for his or her entire career⁶ and retired in 2010 at the full retirement age, his or her annual benefit would be $28,164 ($2,347 per month), the maximum benefit payable under current law.⁷ However, very few Americans receive the maximum benefit as it is extremely rare to have had such consistently high earnings over a lifetime.

The Taxable Earnings Base Over Time

The portion of Social Security covered earnings that areis subject to the payroll tax has fluctuated over time (Figure 1). When the program began in 1937, taxable earnings represented 92% of covered earnings (Table A-1). By 1965, this ratio had dropped to itsa low of 71%. Prior to 1972, the taxable earnings base was updated periodically by Congress, which contributed to its dramatic fluctuations in the 1950s and 1960s. Since 1972Between 1972 and 1977, and since 1982, the base has been indexed to the increase in wages in the economy, which has reduced the volatility somewhat. As described earlier, to raise revenue, Congress raised the taxable earnings base in the 1977 amendments to the Social Security Act to a level that would cover 90% of aggregate earnings by 1982.

17

Figure 1. Percentage of Earnings and Workers Below the Taxable Earnings Base, 1950-2014

Source: Figure prepared by the Congressional Research Service (CRS) based on data from the Social Security Administration, Annual Statistical Supplement, 2015.

Since the 1980s, the share of covered workers below the taxable earnings base has remained relatively stable at roughly 94%. However, the share of covered earnings that areis taxed has fallen from 90% of all earnings in 1982 to 83% in 20072015. The large declines in the late 1990s were mainly becausepercentage of covered earnings since the 1980s were mainly due to salaries for top earners grewgrowing faster than the pay of workers below the cap (see Figure 2), which means top earners had wage growth that was higher than average.¹⁸ Because increases in the taxable maximum are based on average wage growth, salaries for top earners increased faster than the taxable maximum. This increasing gap between top earner salaries and the taxable maximum has led to more earnings that are not covered by payroll taxes (because these earnings are above the taxable maximum), and thus a decline in the percentage of aggregate covered earnings that is below that taxable maximum.

Figure 2. Cumulative Growth in Average Inflation-Adjusted Market Income, by Market Income Group, 1979 to 2013

Source: Congressional Budget Office (CBO).

Notes: Market income consists of labor income, business income, capital gains (profits realized from the sale of assets), capital income excluding capital gains, income received in retirement for past services, and other sources of income. Government transfers are cash payments and in-kind benefits from social insurance and other government assistance programs. Those transfers include payments and benefits from federal, state, and local governments.

The Future of the Taxable Earnings Base The taxable earnings faster than the pay of workers below the cap.⁸

Figure 1. Share of Earnings and Workers Below the Taxable Earnings Base, 1950-2007

Source: Figure prepared by CRS based on data from the Social Security Administration, Annual Supplement, 2009.

The Taxable Earnings Base by State

In 2007, 6% of workers had earnings above the taxable base of $97,500.⁹ However, focusing on the nationwide average hides the diversity among the states and the District of Columbia. The share of the population above the base ranges from a high in New Jersey, where nearly 12% of covered workers earn above the base, to a low in South Dakota, where 2% of workers earn above this amount (see Table A-2). The states with the lowest share of workers over the base are South Dakota, Mississippi, North Dakota, Arkansas, and West Virginia. Those with the highest share of workers over the base are New Jersey, the District of Columbia, Connecticut, Massachusetts, and Maryland.

The Taxable Earnings Base by Employment Status and Gender

According to statistics from the Social Security Administration, a small share of workers earn above the taxable earnings base each year. In 2007, 6% of workers (10.0 million individuals) earned more than the taxable earnings base (Table A-3).¹⁰ Most of the individuals earning above the base were men (7.4 million individuals or roughly 80% of the total). In 2007, 9% of all male workers and 3% of all female workers had earnings above the maximum. Most individuals earning above the base were wage and salary workers (roughly 93% of the total). Only 6.4% of individuals who earned above the base were self-employed.

The Future of the Taxable Earnings Base

The taxable wage base is increased annually by the average growth in wages, so the share of the population below the cap is expected to remain relatively stable over time. However, because of increasing earnings inequality, the share of payroll that is taxed is expected to decline even further (see "The Taxable Earnings Base Over Time"). Under the intermediate assumptions ofin the 20072016 Trustees Report, the percentage of covered earnings that is taxable is projectedassumed to decline to about 8382.5% for 2015.2025.¹⁹ However, the Trustees Report assumes the levels will remain stable thereafter.

²⁰ Projections of the Share of the Population EarningWho Have Earned Above the Taxable Wage Base OverEarnings Base at Least Once in Their Lifetime

Workers' earnings rise and fall during their careers, so any analysis of the population that earns above the taxable wageearnings base in a given year is limited in that it may miss individuals who were above the base in previous years or will have earnings above the base in the future. To address this issue, CRS used the Dynasim microsimulation model to estimate the share of individuals in the future who will ever have earned above the current-law taxable wage base over the course of their lifetimes.¹¹

Figure 2. Share of the Population with Earnings Above the Taxable Wage Base Over Their Lifetime

Source: CRS calculations using the Urban Institute's Dynasim microsimulation model.

In 2007SSA's Office of Retirement Policy provides some projections as to how many workers are expected to ever earn above the taxable earnings base and provides a distribution of these workers by lifetime shared earnings. In 2013, 6% of workers earned more than the taxable earnings base.¹² The Dynasim model projects this share will remain relatively constant over time. Although a small share of workers are projected to earn above the taxable earnings base in a given year, the model estimates that roughly one in five individuals would earn above the maximum at some point in their lifetimes (Figure 2). The model projects that 12% of workers would earn above the earnings base for between one and five years over the course of their working lives. Few individuals sustain the high earnings for long periods in their careers. The model estimates that only 5% of workers would earn above the taxable wage base for more than five years.¹³

Few individuals have earnings higher than a level of taxable earnings that would cover 90% of aggregate earnings (the level Congress attempted to achieve when it last addressed Social Security's finances). The Dynasim model projects that roughly 1% of workers have earnings above a 90% limit each year. In other words, due to high levels of earnings inequality, roughly 1% of the population earn 10% of all the earnings.¹⁴ Looking over the course of an individual's lifetime, the model projects that less than 4% of the population would ever earn above the 90% base and nearly all of those who do would earn above the base for less than five years (Figure 2).

Impact of Raising or Eliminating the Taxable Earnings Base

Raising or removing the taxable earnings base could reduce or eliminate the long-term Social Security deficit.¹⁵ The additional tax revenues would be substantial. However, the21 In SSA's taxable earnings base fact sheet, it is projected that almost 20% of current and future covered workers (through birth cohorts born in 2020) will have at least one year of earnings above the taxable earnings base.²² Figure 3 shows how this group of workers is projected to stabilize as a percentage of the population over the next few decades. Note that the figure groups workers by five-year birth cohorts, so the workers on the right of the graph have not been born yet.

Figure 3. Covered Workers Projected to Earn Above the Taxable Earnings Base in at Least One Year During Worker's Career Source: SSA's Office of Retirement Policy, Population Profiles: Taxable Maximum Earners, https://www.ssa.gov/retirementpolicy/fact-sheets/tax-max-earners.pdf. Notes: Prior to the automatic adjustments of the taxable earnings base in 1974, the irregular changes to the taxable earnings base, coupled with regular growth in average wages, led to a decline in the real value of the taxable earnings base. A decrease in the real value of the taxable earnings base meant more workers in earlier birth cohorts would have earnings above the taxable earnings base (see the percentage of workers with earnings below Social Security base in Table A-1,). With the enactment of automatic adjustments, changes in the real value of the taxable earnings base were minimized, and the number of covered workers earning above the taxable earnings base stabilized. Impact of Raising or Eliminating the Taxable Earnings Base Raising or removing the taxable earnings base could reduce the long-term Social Security deficit (i.e., improve the long-term solvency of the program).²³ The full impact of the policy change would depend on whether the wages above the maximum would also be counted toward benefits. Raising or eliminating the taxable earnings base while maintaining the current benefit structure, where benefits are calculated on the full contribution base, would lead to higher monthly Social Security checks for individuals who earned more than the current taxable wageearnings base during their careers. These higher benefit payments would lead to greater program outlays, although these expenditures would be more than offset by greater tax revenues. WhileAlthough the solvency impact would be improved to a greater degree if the cap on taxes was eliminated and the cap on benefits was retained, the traditional link between contributions and benefits would be broken.

Rather than eliminate the taxable wageearnings base, policymakers could set it to cover a constant share of aggregate earnings. As described previously, the portion of Social Security covered earnings subject to the payroll tax has fluctuated since its inception. Rising inequality—primarilyLarger increases in the earnings of the highest paid individuals—has relative to other workers have led to a decline in the share of U.S. earnings that is taxed. The proportion of earnings that is taxed is projected to continue to fall. Maintaining a consistent tax base would increase revenue and help to improve the system's solvency. Some have proposed raising the taxable earnings base to consistently tax 90% of aggregate U.S. earnings—, restoring it to roughly the level of coverage in 1982 when Congress last addressed Social Security's finances. The Social Security AdministrationSSA and the Joint Committee on TaxTaxation (JCT) have also used this benchmark to analyze the impact of raising the base on the Social Security trust funds and the budget.

The following sections examine the impact of raising or eliminating the taxable wageearnings base on individuals' taxes and benefits, the Social Security trust funds, on federal revenue, and on workers' and employers' behavior.

Impact on Individuals' Lifetime Payroll Taxes and Social Security Benefits ifIf the Taxable WageEarnings Base Were Raised or Eliminated

SSA's Office of Retirement Policy provides projections, using the Modeling Income in the Near Term, Version 7 (MINT7) microsimulation model,²⁴ of the impact of raising or eliminating the taxable earnings base on benefits in 2030, 2050, and 2070.²⁵ The estimates for raising the amount of earnings subject to the payroll tax to 90% are based on a phase in from 2015 to 2024. The estimates for eliminating the taxable earnings base are based on the removal of the taxable earnings base in 2015. Earnings above the current taxable earnings base are included in the benefit computations. SSA also provides the change in benefits among different demographic groups and estimates of the median percentage change of benefits for all beneficiaries and affected beneficiaries.

SSA, however, does not provide projections of the changes in taxes paid by demographic groups. . Because of the linking of taxes and benefits in this proposal, the change in benefits provides an idea of how many individuals are paying more taxes, but the values are not identical. Dependents receive higher benefits when a worker pays more in taxes, so beneficiaries with higher benefits might not have paid higher taxes. Retired worker benefits represent three quarters of the affected beneficiaries; spouse and widow(er) benefits make up around a quarter of the affected beneficiaries.²⁶

Based on the projections, if the taxable earnings base was eliminated and all earnings were subject to the Social Security payroll tax, 6% of all beneficiaries would receive a higher benefit amount in 2030, with a median percentage increase in benefits of 4% for affected beneficiaries. The percentage of beneficiaries affected would be 16% in 2050 and 19% in 2070, and the median percentage change in benefits would be 6% in 2050 and 8% in 2070.²⁷ Phasing in the increase to the taxable earnings base to make 90% of earnings subject to the payroll tax leads to a median percentage change in benefits of 2% in 2030, 5% in 2050, and 7% in 2070.²⁸

The discussion of the impact on beneficiaries by group will use the projections from eliminating the taxable earnings base, to avoid complications with how the change is phased in (because the projections for raising the amount of earnings subject to the payroll tax to 90% are based on a phase in from 2015 to 2024, while the projections for eliminating the taxable earnings base are based on an immediate elimination), coupled with the fact that beneficiaries whose benefits change by less than 1% are not considered affected in the projections.²⁹

Changes by Income Group Figure 4 shows that the impact of eliminating the taxable earnings base immediately on benefits varies significantly by income group (quintiles).³⁰ Few beneficiaries in the lowest quintile would see an increase in benefits in 2030 compared with the 17% of beneficiaries in the highest quintile who would gain increased benefits if the taxable earnings base was increased. The percentage of beneficiaries affected by an increase in the taxable earnings base more than doubles in 2050. By 2070, almost half of the beneficiaries in the highest quintile would have an increase in benefits if the taxable earnings base was removed.

Figure 4. Projected Percentage of Beneficiaries Affected, by Income Quintile Source: SSA, Office of Retirement Policy; Table 1 from https://www.ssa.gov/retirementpolicy/projections/taxation/remove-tax-max-include-2030.html, https://www.ssa.gov/retirementpolicy/projections/taxation/remove-tax-max-include-2050.html, and https://www.ssa.gov/retirementpolicy/projections/taxation/remove-tax-max-include-2070.html.

Notes: The projected percentage increase of beneficiaries in the lowest quintile in 2030 shows 0% due to rounding. Income groups are defined using annual family income for the year of the projection, so some low income beneficiaries are affected by the policy if they earned above the taxable earnings base at any point in their careers. Beneficiaries must receive a greater than 1% difference in benefits in order to be considered affected.

Increases in benefit amounts among affected beneficiaries would be similar for the lower four quintiles across the three different projection years, with a median percentage change between 3% and 7%. The changes fluctuate slightly between each projection year, but remain relatively stable. Conversely, the highest quintile would see an increase in median change in benefits, from 5% in 2030 to 13% in 2070.³¹

Changes by Age The percentage of beneficiaries affected, by age, with the elimination of the taxable earnings base is shown in Figure 5. In 2030, very few people aged 80 and older would have higher benefits if the taxable earnings base was eliminated in 2015. This makes sense, because these workers would have been over 65 years old in 2015, and likely to have retired already. In 2050, the percentage of beneficiaries in the different age groups that have higher benefits would be higher. Similar to 2030, older cohorts would have fewer beneficiaries with higher benefits, although the age cut-off is 90 and older, as opposed to 80. This percentage changes in 2070, in which the largest change in beneficiaries with higher benefits would happen for the older cohorts.

Figure 5. Projected Percentage of Beneficiaries Affected, by Age Source: SSA, Office of Retirement Policy; Table 1 from https://www.ssa.gov/retirementpolicy/projections/taxation/remove-tax-max-include-2030.html, https://www.ssa.gov/retirementpolicy/projections/taxation/remove-tax-max-include-2050.html, and https://www.ssa.gov/retirementpolicy/projections/taxation/remove-tax-max-include-2070.html.

Notes: The projected percentage increase of beneficiaries in the aged 80-89 group in 2030 shows 0% due to rounding; the projected percentage increase of beneficiaries in the aged 90+ group in 2030 is a true 0%.

The change in benefit amounts among affected beneficiaries tends to increase in the later years. Older cohorts have a smaller median change in benefit amounts, as they have fewer years of contributing higher taxes. The aged 60-69 cohort in 2050 would not have had a cap on the taxable earnings base, and thus no cap on benefits, for much of their career, whereas the aged 90+ cohort has only a few years' worth of potential to earn higher benefits. By 2070, all cohorts would have had most or all of their careers without the taxable earnings base, and the median percentage change in benefits would be about 8% for all age cohorts.³²

Impact on the Social Security Trust Funds The 2016 Trustees Report projects that without any changes to current law, the OASDI trust funds would be depleted (i.e., the trust fund will have a balance of zero) in 2034. Under the intermediate assumptions of the 2016 Trustees Report, SSA actuaries calculate that it would take an immediate 2.68% increase in combined payroll taxes of taxable payroll (from 12.40% to 15.08%) to achieve solvency over the next 75 years.³³ The actuaries have estimated the impact on the trust funds of numerous policies related to the taxable earnings base.³⁴ Contributions can be increased by (1) eliminating the taxable earnings base, (2) raising the taxable earnings base such that, for example, 90% of earnings are subject to the payroll tax, or (3) taxing earnings above the current taxable earnings base, but not at the current payroll tax rate. To accommodate changes to the payroll tax, benefits associated with earnings above the current taxable earnings base can be (1) credited as they are now; (2) still count towards benefits, but at a reduced rate; or (3) not credited at all.³⁵ Table 3 presents some trust fund solvency outcomes of a few of these proposals, as estimated by SSA's Office of the Chief Actuary: the percentage of the 75-year shortfall eliminated with the proposal, and the year the combined trust fund is projected to be depleted. None of the proposals involving a change to the taxable earnings base result in long-term (75-year) solvency. The table focuses on eliminating and raising the taxable earnings base, because these two changes to the contributions include different proposals on how to change the benefits, and illustrates how contributions and benefits interact to affect the shortfall and date of trust fund depletion. A brief discussion on the impact of applying a payroll tax above the current taxable earnings base is included below. Table 3. Impact on the Social Security Trust Funds of Raising or Eliminating the Social Security Taxable Earnings Base

Options

75-year Shortfall Eliminated

Year of Trust Fund Depletion

Current Law

—

2034

1. Eliminate taxable earnings base, so all earnings are subject to payroll tax, with…

1A

No credit to benefits (retain cap for benefit calculations)

89%

2082

1B

Credit to benefits (current benefit formula)

72%

2067

1C

Adjusted benefits (new benefit formula)^a

81%

2074

Increase taxable earnings base so 90% of aggregate earnings are subject to payroll tax:

2. Phase in increase (2017-2026), with...

2A

No credit to benefits (retain cap for benefit calculations)

37%

2041

2B

Credit to benefits (current benefit formula)

29%

2041

3. Additional 2% increase in indexing until reach 90%, with...

3A

No credit to benefits (retain cap for benefit calculations)^b

28%

2036

3B

Credit to benefits (current benefit formula)^c

24%

2036

3C

Adjusted benefits (new benefit formula)^d

24%

2036

Source: SSA's Office of the Chief Actuary, Solvency Provisions: Payroll Taxes, https://www.ssa.gov/oact/solvency/provisions/payrolltax_summary.pdf.

Notes: Projections based on intermediate assumptions of 2016 Trustees Report. The Trustees Report uses three sets of assumptions to project trust fund solvency to generate a range of possibilities: low cost, intermediate cost, and high cost. The Trustees Report's primary text uses the intermediate (cost) assumptions.

a. New benefit calculation: add a bend point at current taxable earnings base and apply a formula factor of 3% to AIME above the new bend point. See footnote 35 for a summary on how Social Security benefits are calculated under current law. b. Begin increase in 2019. c. Begin increase in 2017. d. Begin increase in 2018. New benefit calculation: add a bend point at current taxable earnings base and apply a formula factor of 5% to AIME above the new bend point. See footnote 35 for a summary on how Social Security benefits are calculated under current law. Option 1A: Eliminate Taxable Earnings Base, with No Additional Benefits

The Social Security Administration's Office of the Chief Actuary analyzed three proposals that involve eliminating the taxable earnings base cap immediately, so that all earnings are taxed; these proposals differ based on how benefits are calculated to take into account earnings above the current taxable earnings base. In all three proposals, the trust fund depletion date is pushed back by at least 30 years. If no credits to benefits are provided for earnings above the current taxable earnings base (i.e., earnings above the current taxable earnings base do not count toward benefits),³⁶ the trust fund becomes depleted a little less than a decade before the long-range 75-year solvency target. The increased revenue would eliminate 89% of the projected shortfall and the program would have a projected shortfall equal to 0.30% of taxable payroll. Under this scenario, the payroll tax rate would need to be increased from 12.40% to 12.70% or other policy changes would have to be made for the system to be solvent for the next 75 years. However, the traditional link between the level of wages that is taxed and the level of wages that counts toward benefits would be broken.

Option 1B: Eliminate Taxable Earnings Base, with Current Benefits Formula

If the earnings base was completely eliminated for both employers and employees so that all earnings were taxed, but all wages counted toward benefits as they are now,³⁷ the trust fund would be depleted in 2067; 76% of the projected financial shortfall in the Social Security program would be eliminated. To achieve solvency for the full 75-year projection period under this option, the total payroll tax rate would have to be raised by an additional 0.76 percentage points (from 12.40% to 13.16%) or other policy changes would have to be made to cover the shortfall.

Under this scenario, high earners would pay higher taxes but also receive higher benefits, maintaining the traditional link between the tax paid and benefits received. The net benefit to the trust funds is still positive, as $5 in additional revenue would provide only $1 in additional benefits, on average, over their 75-year valuation period. Some annual Social Security benefit payments would be much higher than today's maximum (if claimed at full retirement age) of $32,244. To contextualize how benefits are affected by the increase in contributions, authors Reno and Lavery estimate that a worker who paid taxes on earnings of $400,000 each year would get a benefit of approximately $6,000 a month or $72,000 a year, a replacement rate of 18%; whereas someone with lifetime earnings of $1 million a year would get a monthly Social Security benefit of approximately $13,500 a month or $162,000 a year, a replacement rate of 16.2%.³⁸

Option 1C: Eliminate Taxable Earnings Base, with Adjusted Benefits

One possibility to maintain the link between contributions and benefits, but limit the benefits for high earners, is to change the benefit formula. This is generally done by adding a new bend point, with a lower conversion rate for the additional contributions from the removal of the taxable earnings base. The proposals scored by SSA that contain a provision with a new benefit formula have projections that are close to halfway between the "no additional benefit" and the "current benefit" proposals. The proposal that changes the benefit computation formula to include a new bend point at the current-law taxable earnings base and applies a formula factor of 3% for AIME above this new bend point extends the year of trust fund depletion to 2074.³⁹ This proposal eliminates 81% of the shortfall. The payroll tax would need to increase from 12.40% to 12.92% or other policy changes would have to be made for the system to be solvent for the next 75 years.

Options 2 and 3: Increase Taxable Earnings Base to Cover 90% of Earnings

Proposals from various organizations to increase the taxable earnings base to cover 90% earnings generally follow two approaches to phasing in the new taxable earnings base. One option is to phase in the increase over the next 10 years (option 2); the other option is to increase the taxable earnings base by an additional 2% on top of year-to-year indexing, until taxable earnings cover 90% of covered earnings (option 3). The second method is estimated to take around 40 years to cover 90% of earnings. None of the option 2 or option 3 proposals delays the date of trust fund depletion by more than seven years.

Phasing in the increase over the next 10 years can cover 29%-37% of the shortfall, requiring an increase of 1.68%-1.89% in the payroll tax or other policy changes would have to be made to eliminate the shortfall. ⁴⁰ Phasing in the increase by increasing the taxable earnings base by an additional 2% a year will cover approximately 25% of the shortfall, with trust fund depletion in 2034. ⁴¹ In both cases, paying higher benefits on the additional covered earnings does little to change the fund depletion date.

Taxes for Earnings Above the Taxable Earnings Base

SSA scored several proposals that apply a tax to earnings above the taxable earnings base.⁴² This is similar to eliminating the taxable earnings base cap, but reduces the amount workers have to pay on these higher earnings. Proposals generally have tax rates between 2% and 5%, with some proposals allowing for the higher tax rates to be phased in over the course of a few years. Even though most of these proposals do not include higher benefits, the only proposals that cover more than half of the shortfall have payroll tax rates of more than 6%. One proposal increases the taxable earnings base to cover 90% of earnings, with a 6.2% tax rate for earnings above the revised taxable earnings base;⁴³ this proposal has a trust fund depletion date of 2049 and covers 53% of the long-range shortfall.

Impact on Federal Revenue

Raising the taxable earnings base would lead to an increase in total federal revenues. JCT and the Congressional Budget Office (CBO) estimated that raising the wage base to cover 90% of earnings to $245,000 in 2017, would generate $273.1 billion in additional revenue over the five-year budget window (2017-2021) and more than $648 billion over the 10-year window (2022-2026).⁴⁴ The change in revenues would consist of an increase in receipts from Social Security payroll taxes, which would be off-budget, offset in part by a reduction in individual income tax revenues, which would be on-budget.⁴⁵ The reduction in income tax revenue is due to the decrease in after-tax take home pay leading to fewer hours worked and a substitution to (payroll) tax-exempt fringe benefits in lieu of wages. Outlays, via additional payments of Social Security benefits, would total about $15 billion over the 10-year period, and would be classified as off-budget.

Table 4. Effect on the Deficit: Increasing the Maximum Taxable Earnings for the Social Security Payroll Tax, Cover 90% of Aggregate Covered Earnings

(in billions of dollars)

                     

Total

 

2017

2018

2019

2020

2021

2022

2023

2024

2025

2026

2017–2021

2017–2026

Change in outlays

0.1

0.2

0.5

0.7

1.1

1.5

1.9

2.5

3.1

3.8

2.6

15.4

Change in revenues

18.6

60.1

62.5

64.7

67.3

70.1

72.4

75

77.7

80.2

273.1

648.4

Decrease in the deficit

-18.5

-59.9

-62

-64

-66.2

-68.6

-70.5

-72.5

-74.6

-76.4

-270.5

-633

Source: Staff of the Joint Committee on Taxation (JCT); Congressional Budget Office (CBO). https://www.cbo.gov/sites/default/files/114th-congress-2015-2016/reports/52142-budgetoptions.pdf.

Note: Based on option taking effect in January 2017.

Impact on Workers' and Employers' Behavior

The reaction of high-earning workers and their employers to raising or removing the taxable earnings base is unknown and was not taken into consideration in the above estimates of the distributional, trust fund, and revenue impacts.

Workers who earn more than the cap would have a reduced incentive to work as their after-tax earnings will fall.⁴⁶ However, whether these individuals would significantly reduce the amount they work is a matter of debate; each worker would face a different choice between the reduced earnings and the additional leisure time, based on the worker's individual preferences.⁴⁷ Workers earning above the current base would also have an incentive to change the form of their compensation (e.g., from earnings to fringe benefits) to avoid paying additional payroll taxes.⁴⁸

The impact of raising the base on employers of high-income earners is also unknown. Employers contribute 6.2% of workers' wages up to the taxable earnings base toward Social Security. If employers are unable to pass along the higher tax costs to workers in the form of reduced earnings, their overall labor costs will increase. Employers may react by raising prices to consumers; reducing other non-wage forms of compensation, such as health benefits or pensions; or reducing the number of workers.

Arguments For and Against Raising or Eliminating the Base

Some arguments for and against changing the Social Security taxable earnings base follow.

Arguments For

The major critique about the Social Security base is that it creates a regressive tax structure. Workers earning less than the base have a greater proportion of earnings taxed than workers whose earnings exceed it. In 2017, someone with annual earnings of $30,000 pays $1,860 in Social Security taxes, or 6.2% of his or her earnings (ignoring the employer share of the tax). However, because the tax is levied on only the first $127,200 in earnings, someone earning $200,000 a year pays $7,886, or 3.9%, of his or her earnings.⁴⁹

Supporters of changing the wage base point out that only 6% of workers have earnings above the base in any given year. However, because of rising earnings inequality, the amount of their earnings that escapes taxation has risen from 12% to 15% since 1991. They therefore contend that the current tax structure favors a small group of the higher-earning workers in society.

They also point out that the overall employee tax rate rose by 25%, from 6.13% in 1980 to 7.65% in 1990 (counting the Medicare portion) and suggest that this increase is one of the main reasons for a disproportionate rise in the aggregate federal tax burden on lower- and middle-income people over that decade.⁵⁰ They further maintain that for most workers, Social Security and Medicare taxes (counting the employer share, which they view as foregone wages) are now greater than their income taxes.

Supporters argue that subjecting a larger percentage of earnings to the payroll tax would also adjust for the higher life expectancies of high earners.⁵¹ On average, people with more education and higher earnings live longer than those with less education and lower earnings, and this difference has been growing over time. The impact on the Social Security program is that higher-earning individuals receive benefits for more years over their lifetimes making the system less progressive.⁵² Supporters claim that raising the taxable earnings base would make a reasonable adjustment for the faster-than-average life expectancy gains among high earners.

Among supporters of changing the current base, there is disagreement regarding how high the base should be raised or if other changes should be made to tax income above the base. Several proposals would not eliminate the base entirely but raise it to cover 90% of taxable wages, restoring the level that was set in the 1977 amendments to the Social Security Act. Other options would be to remove the capEliminated

To estimate how much individuals' taxes and benefits would rise if the wage base were eliminated, CRS has used the Dynasim microsimulation model to look at Social Security beneficiaries in the year 2035. The estimates assume the taxable wage base would be completely eliminated starting in 2013 for calculating both the payroll taxes and future Social Security benefits. The following sections detail the impact of eliminating the base on beneficiaries based on their income and gender.¹⁶

Aggregate Changes

If the base were removed, the majority of beneficiaries would pay no additional taxes compared with current law, as fewer than 8% of workers are projected to earn above the taxable wage base each year. Examining the impact on individuals receiving Social Security benefits in 2035, roughly one in five beneficiaries (21%) would have paid any additional taxes over their lifetimes compared with current law (Figure 3). For most of these affected individuals, the increase would be moderate. Roughly 16% of all beneficiaries would see their lifetime tax payments increase by less than 10%. However, 3% of all beneficiaries would have their tax payments increase by 10% to 19%, and 2% would have tax increases of 20% or more.

To maintain the traditional link between contribution and benefits, policymakers could choose to calculate benefits based on a worker's total earnings, including those above the taxable wage base. Under this option, some beneficiaries would receive higher Social Security benefits. CRS estimates that 23% of beneficiaries in 2035 would have higher benefits than under current law. This share of beneficiaries who receive higher benefits is greater than the share of individuals who pay higher taxes because some low earners receive benefits based on their spouses' higher earnings. Most of the affected beneficiaries (20%) would see their benefits increase by less than 10% relative to current law. Only 3% of beneficiaries would see their benefits increase by 10% or more.

Although 21% of beneficiaries in 2035 would pay some additional payroll taxes over the course of their lifetimes if the base were removed, the average change in taxes and benefits would be small. Looking only at individuals who would pay higher taxes over the course of their lifetimes, at the median, total lifetime tax payments would rise by 3% and benefits would increase by 2% relative to current law.

Figure 3. Share of Beneficiaries in 2035 with Tax and Benefit Increases Compared with Current Law If the Taxable Earnings Base Is Eliminated, by Level of Increase

Source: CRS calculations using the Urban Institute's Dynasim microsimulation model. Note: Lifetime taxes include both individual and employer OASDI contributions or self-employment contributions throughout the individual's entire career.

Changes by Income Group

The impact of eliminating the taxable wage base on payroll taxes paid varies significantly by income group.¹⁷ The overwhelming majority (98%) of beneficiaries in 2035 in the lowest income quintile would pay no additional taxes over their lifetime (Figure 4). Few in this group would receive benefit increases if the cap were removed. Under this proposal only 3% of beneficiaries in the lowest income category would receive benefit increases, and the increase would be for less than 10%.

The story is different for higher-income beneficiaries. Roughly one-half of those in the highest income quintile are estimated to have had tax increases over their lifetimes relative to current law. Whereas 35% of beneficiaries in the top quintile would see their lifetime taxes rise by less than 10%, some (7%) would see their taxes rise between 10% and 19% and some (6%) would see their taxes rise 20% or more. Beneficiaries in the highest income groups would also see the largest change in their benefits if the taxable wage base were removed. One-half of beneficiaries in the top fifth of the income distribution in 2035 would have an increase in benefits relative to current law. In this highest quintile, 42% would have benefit increases of less than 10%, some (5%) would have benefit increases of 10%-19% and a few (3%) would have benefit increases of 20% or more.

Figure 4. Share of Beneficiaries in 2035 with Higher Payroll Taxes or Benefits Compared with Current Law If the Taxable Earnings Base Is Eliminated, by Highest and Lowest Quintile

Source: CRS calculations using the Urban Institute's Dynasim microsimulation model.

Changes by Gender

Because the majority of workers who earn above the taxable wage base in a given year are men (Table A-3 and described above), men would be more likely to pay higher payroll taxes than women if the taxable wage base were eliminated. Among men who receive benefits in 2035, more than one in four would pay higher payroll taxes over the course of their lifetimes (Figure 5). Twenty percent of male beneficiaries would have a tax increase of less than 10%, but 7% would see their lifetime tax contributions increase by more than 10%. If the taxable earnings base was removed, one in four men would receive higher benefits. The majority of the men affected (22% of all male beneficiaries) would see a small increase in benefits, but 3% of all men would have benefits increase by more than 10%. In contrast, only 15% of women who receive benefits in 2035 would have paid any additional payroll taxes over the course of their lives. Of these women, only 2% would have an increase of more than 10%. Because many women receive benefits based on their spouses' earnings, the share of women who would see a rise in benefits is higher than the share that would pay additional taxes. Although the benefits of one in five female beneficiaries in 2035 would rise, for most it would be a small increase of less than 10%.

Figure 5. Share of Male and Female Beneficiaries in 2035 with Higher Payroll Taxes or Benefits Compared with Current Law If the Taxable Earnings Base Is Eliminated, by Gender

Source: CRS calculations using the Urban Institute's Dynasim microsimulation model.

Impact on the Social Security Trust Funds

Under the assumptions of the 2009 Trustees Report, the actuaries at the Social Security Administration calculate that it would take an immediate increase in combined payroll taxes of 2.0% of taxable payroll (from 12.40% to 14.40%) to achieve solvency over the next 75 years.¹⁸ Without this increase or other changes to the system, the 2009 Trustees Report projected that the OASDI Trust Funds would be exhausted in 2041. The actuaries at SSA have estimated the impact on the Trust Funds of three options to change the benefit and contribution base which are described below.

Option 1: Cover 90% of Earnings and Pay Higher Benefits

One proposal would slowly raise the taxable wage base for both employers and employees to cover 90% of all earnings and credit these taxes to allow individuals to receive correspondingly higher benefits. In 2006, it was estimated that a cap of $171,600 would roughly cover 90% of wages.¹⁹ Under this option, benefits at retirement for high earners would also rise. These changes would have a net positive impact on the Social Security Trust Funds (Table 2). Raising the wage base to 90% would eliminate 43% of the long-range financial shortfall—extending the Trust Funds' exhaustion date to 2044. To achieve solvency for the full 75-year projection period under this option, the total payroll tax rate would have to be raised by an additional 1.09 percentage points (from 12.40% to 13.49%) or other policy changes would have to be made to cover the shortfall.²⁰

Option 2: Cover All Earnings and Pay Higher Benefits

If the earnings base was completely eliminated for both employers and employees so that all earnings were taxed, 95% of the projected financial shortfall in the Social Security program would be eliminated. To achieve solvency for the full 75-year projection period under this option, the total payroll tax rate would have to be raised by an additional 0.1 percentage points (from 12.4% to 12.5%) or other policy changes would have to be made to cover the shortfall.

Under this scenario high earners would pay higher taxes but also receive higher benefits. However, the net benefit to the Trust Funds is positive as $5 in additional revenue would provide only $1 in additional benefits (on average over their 75-year valuation period). Annual Social Security benefit payments would be much higher than today's maximum of $25,440. A worker who paid taxes on earnings of $400,000 each year would get a benefit of approximately $6,000 a month or $72,000 a year—a replacement rate of 18%—while someone with lifetime earnings of $1 million a year would get a monthly Social Security benefit of approximately $13,500 a month or $162,000 a year—a replacement rate of 16.2%.²¹

Option 3: Cover All Earnings and Pay No Additional Benefits

Finally, if the base was completely eliminated for both employers and employees so that all earnings were taxed, but those earnings did not count toward benefits, solvency would be restored to Social Security. The increased revenue would eliminate 115% of the projected shortfall and the program would have a projected surplus equal to .28% of taxable payroll. Under this scenario, the payroll tax rate could be immediately lowered from 12.40% to 12.12% and the system would remain solvent for the next 75 years. However, the traditional link between the level of wages that is taxed and the level of wages that counts toward benefits would be broken.

Impact on Federal Revenue

Raising the taxable earnings base would lead to an increase in total federal revenues. The Joint Committee on Taxation has estimated that raising the wage base to 90% of earnings, to $186,000 in 2008, would generate $221 billion in additional revenue over the five-year budget window of 2008-2012 (Table 3).²² Over 10 years, the policy would generate more than $524 billion. Raising the payroll tax base to cover an additional 1%-2% of income (above the 90% level) would generate $32 billion-$64 billion more over five years and $80 billion-$158 billion more over 10 years.

Impact on Workers' and Employers' Behavior

The reaction of high-earning workers and their employers to raising or removing the taxable earnings base is unknown and was not taken into consideration in the above estimates of the distributional, trust fund, and revenue impacts.

Workers who earn more than the cap would have a reduced incentive to work as their after-tax earnings will fall.²³ However, whether these individuals would significantly reduce the amount they work is a matter of debate.²⁴ Each worker would face a decision between the reduced earnings and the additional leisure time, based on the worker's individual preferences. Workers who have earnings above the current base would also have an incentive to change the form of their compensation (e.g., from earnings to fringe benefits) to avoid paying additional payroll taxes.²⁵

The impact of raising the base on employers of high-income earners is also unknown. Employers contribute 6.2% of workers' wages up to the taxable wage base toward Social Security. If employers are unable to pass along the higher tax costs to workers in the form of reduced earnings, their overall labor costs will increase. Employers may react by raising prices to consumers, reducing other non-wage forms of compensation such as health benefits or pensions, or reducing the number of workers.

Arguments For and Against Raising or Eliminating the Base

Some of the general arguments for and against changing the Social Security taxable earnings base follow.

Arguments For

The major critique about the Social Security base is that it creates a regressive tax structure. Workers earning less than the base have a greater proportion of earnings taxed than workers whose earnings exceed it. In 2008, someone with annual earnings of $30,000 pays $1,860 in Social Security taxes, or 6.2% of his or her earnings (ignoring the employer share of the tax). However, because the tax is levied on only the first $106,800 in earnings, someone earning $200,000 a year pays $6,622 or 3% of his or her earnings.

Supporters of changing the wage base point out that only 6% of workers have earnings above the base in any given year. However, because of rising earnings inequality, the amount of their earnings that escapes taxation has risen from 12% to 15% since 1991, and is projected to continue to rise through 2014. They therefore contend that the current tax structure favors a small group of the more well-off workers in society.

They also point out that the overall employee tax rate rose from 6.13% in 1980 to 7.65% in 1990 (counting the Medicare portion)—or by 25%—and assert that this increase is one of the main reasons for a disproportionate rise in the aggregate federal tax burden on lower- and middle-income people over that decade.²⁶ They further maintain that for most workers, Social Security and Medicare taxes (counting the employer share, which they view as foregone wages) are now greater than their income taxes.

Supporters argue that subjecting a larger percentage of earnings to the payroll tax would also adjust for the higher life expectancies of high earners.²⁷ On average, people with more education and higher earnings live longer than those with lower earnings and less education and this difference has been growing over time. The impact on the Social Security program is that these individuals receive benefits for more years over their lifetimes making the system less progressive.²⁸ They claim that raising the taxable wage base would make a reasonable adjustment for the faster-than-average life expectancy gains among high earners.

Thus, supporters of changing the base argue that raising or eliminating the base not only would be more fair, but also that Social Security's projected long-range financing problems could be substantially alleviated or, alternatively, that the payroll tax rate could be reduced without causing a loss of revenue to the system. It is estimated that almost $100 billion in revenue to the Social Security program would be generated annually by taxing all earnings, and if such revenues were not used to lower the tax rate, they would reduce the government's outstanding debt and eliminate about 95% of Social Security's long-range deficit.

Among supporters of changing the current base, there is disagreement regarding how high the base should be raised or if other changes should be made to tax income above the base. Several proposals would not eliminate the base entirely but raise it to cover 90% of taxable wages, restoring the level that was set in the 1977 amendments to the Social Security Act. Others have claimed that increasing the base to 90% would be a large tax increase for those who earn between the current base and the new level, but would have little impact on the share of taxes paid by individuals with the highest earnings.²⁹ Other options would be to remove the cap completely over the base, but lower the tax rate on those higher earnings³⁰, but lower the tax rate on those higher earnings or tax employers and employees at different rates above the current base.⁵³ Others have called for broadening the sources of income that are taxed beyond earnings.³¹54 Proponents of these ideas argue that they would close a significant portion of Social Security's long-range deficit without subjecting upper-middle income individuals to sizeable increases in their marginal tax rates.

Arguments Against

Those who support keeping the base as it is point out that whilealthough the structure of the payroll tax may be regressive, it is offset by the progressive calculation of benefits.

⁵⁵

TheySupporters further maintain that its critics fail to take into account the effect of other tax and transfer programs targeted to low- earners. They point out that mitigating the Social Security tax bite was part of the motivation for creating the earned income tax credit (EITC), which provides an income tax credit on earnings up to $41,646 in 200853,930 in 2017 for married workers with twothree or more children (up to $15,88020,600 for married workers without children).⁵⁶ They also point out that low-income families receive a greater share of government transfer payments that are not subject to Social Security payroll taxes. They argue that the combination of these factors mitigates the flat-rate nature of the tax at lower earnings levels, and that for most other workers the tax is proportional (because it is flat- rate). It is only at the upper end of the income spectrum that it takes on a regressive appearance.

⁵⁷

Critics also argue that raising the cap will serve as a disincentive to work and could serve as a drain on the economy.³²58 Because additional work effort would generate less after-tax income, supporters claim that workers faced with this higher marginal rate would either reduce their hours or avoid the tax by changing the form of their compensation.

From another perspective, some—who might otherwise espouse progressive taxation—support raising the base but not eliminating it. HavingThere are additional arguments against eliminating the taxable earnings base. For example, maintaining a cap makes Social Security seem less like general purpose taxation. They argueAnother argument is that the system needs support from people of all earnings levels, and that the larger benefits that high earners would receive would represent a poor return for the higher taxes they would pay. Moreover, regardless of the money's worth issue, someSome question the wisdom of paying large benefits to well-to-do people. They arguehigher-income people, arguing that the purpose of the program is to provide a floor of protection for retirement, not large benefits for those who can save on their own. TheyThese people contend that eliminating the base would raise public cynicism about a publicly financed system that pays enormous benefits to people who already are well off.

⁵⁹ Appendix. Taxable Earnings Bases and Worker Income: Detailed Tables

Footnotes

Number of Workers^a

(in thousands)

 

1.	The reason for the two-year lag in reflecting increases in average wages in the taxable earnings base is that average wages for the year immediately prior to the year of the increase simply are not known in time.
2.	The maximum for a worker was to be $3,000 per year per employer, so that, under the original legislation enacted in 1935, someone could have paid tax on more than $3,000 in earnings per year (and received benefits from all such wages) if they worked for more than one employer.
3.	The same maximum taxable amount was set for the self-employed when they were covered in 1951 and for the Disability Insurance (DI) portion of the tax when it was first levied in 1957.
4.	Social Security Administration, Office of the Chief Actuary, Social Security Program Fact Sheet, available at http://www.ssa.gov/OACT/FACTS/index.html. Some workers (approximately 4%) are exempt from Social Security payroll taxes and are therefore not "covered" by Social Security. From this point forward, all references to earnings are "covered" earnings and workers are "covered" workers. For a listing of workers who are exempt from Social Security taxes, see CRS Report 94-28, Social Security and Medicare Taxes and Premiums: Fact Sheet, by [author name scrubbed].
5.	$106,800 x 6.2% = $6,622 and $106,800 x 12.4% = $13,243.
6.	The Social Security benefit formula calculates benefits based on a worker's highest 35 years of earnings.
7.	Social Security Administration, 2009 Fact Sheet, available at http://www.ssa.gov/pressoffice/factsheets/colafacts2009.pdf.
8.	At least some of this decline and subsequent increase in the ratio after 2000 is believed to be due to stock option activity surrounding the stock market bubble in 2000 and is not likely to recur. (SSA, 2005 OASDI Trustees Report.)
9.	Note that the years denoted for Table A-1, Table A-2, and Table A-3 differ slightly due to differences in availability of data.
10Taxable Earnings Base of $113,700 by Type of Earnings and Sex, 2013	Group	Percentage of Workers (as percentage of)		Total	with Earnings Above the Taxable Earnings Base	Workers with Earnings Above Taxable Earnings Base	Workers Within Group	All workers

163,355

9,799

100%

6

.0%

Men

84,838

7,296

74

.5%

8

.6%

Women

78,517

2,513

25

.6%

3

.2%

All wage and salary workers

152,378

9,211

94

.0%

6

.0%

Men

78,462

6,837

69

.8%

8

.7%

Women

73,896

2,375

24

.2%

3

.2%

All self-employed

18,609

790

8

.1%

4

.2%

Men

10,411

631

6

.4%

6

.1%

Women

8,198

158

1

.6%

1

.9%

Source: Social Security Bulletin, Annual Statistical Supplement, 2015, at https://www.ssa.gov/policy/docs/statcomps/supplement/2015/supplement15.pdf. The Congressional Research Service (CRS) calculations based on 2013 estimates from tables, 4.B1, 4.B4, 4.B7, and 4B.9.

Notes: Totals do not necessarily equal the sum of rounded components.

a. Workers with earnings in both wage and salary employment and self-employment are counted in each type of employment but only once in the total. Origin and History of the Taxable Earnings Base

In 1935, the designers of Social Security, President Franklin Roosevelt's Committee on Economic Security, did not recommend a maximum level of taxable earnings in its plan, and the draft bill that President Roosevelt sent to Congress did not include one. The bill emphasized who was to be covered by the system, not how much wages should be taxed. Being in the midst of the Depression, the Administration's attention was on the large number of aged people living in poverty. The committee's goal in proposing a Social Security program was to complement public assistance measures (Old-Age Assistance) in its plan. ⁸ The plan offered immediate cash aid to the aged poor and created an earnings-replacement system intended to lessen the need for welfare benefits in the long run. It was recognized that the new system would not be sufficient to provide full income in retirement, but would provide a "core" benefit as a floor of protection against poverty. Not concerned about high-income retirees, the Administration's proposal exempted non-manual workers earning $250 or more a month ($3,000 a year) from coverage. Manual workers were to be covered regardless of their earnings, but few had earnings above this level.

It was the Social Security bill reported by the House Ways and Means Committee that clearly established a maximum taxable amount, which the bill set at $3,000 per year.⁹ In addition, the committee dropped the exemption for non-manual workers with high earnings. The committee's report and floor statements made at the time give no clear record as to the reasoning for the taxable limit, but concerns about tax equity and attaining as much program coverage of the workforce as possible were suggested as factors for rejecting the high-earner exemption. Not covering high earners meant that they would not pay the tax while lower-wage earners would, and coverage would be erratic for workers whose earnings fluctuated above and below the $250 monthly threshold.

Although tax policy concerns were raised in later years, with a higher base preferred by those seeking a more proportional tax system, there was little, if any, serious attention given to eliminating the base entirely. In the late 1940s and early 1950s, and to a lesser extent later on, the major arguments concerned the base's size and how it affected the development of Social Security. A larger base meant that more earnings would be credited to a person's Social Security record and would lead to higher benefits (because benefits are based on a worker's contribution into the system via taxes on earnings). Proponents argued that the base needed to be raised to reflect wage or price growth so that the benefits of recipients, in particular moderate and well-to-do recipients, would not erode over time, thereby preserving their support for the system.¹⁰ Critics argued that this would increase benefits for people who could save on their own while making saving by private means more difficult.¹¹

Prior to 1974, increases to the taxable earnings bases were specifically legislated on an ad hoc basis. However, a period of large increases to the cost of living (e.g., 5.5% in 1970) led to concerns that such a rise in the cost of living would reduce the purchasing power of Social Security benefits, and that ad hoc increases might be insufficient.¹² President Nixon had recommended automatic adjustments to benefits in 1969, but efforts in 1970 and 1971 to incorporate automatic adjustments failed. This changed in 1972, when H.R. 1 (which would eventually become the Social Security Amendments of 1972; P.L. 92-603) gained traction. The bill included a COLA provision, but this provision, along with some others, split off from the main text, and was enacted under P.L. 92-336 instead. P.L. 92-336 included procedures that increased the taxable earnings base automatically as a means of financing COLAs for Social Security recipients, though the adjustment to the taxable earnings base was tied to average wages.¹³

The Social Security Amendments of 1977 (P.L. 95-216) gradually increased the base beyond what resulted from the automatic-adjustment procedures from 1978 to 1981, such that in 1981, the taxable earnings base was $7,500 higher than the "old-law" base.¹⁴ This was done as a means of raising revenue to help shore up the program's ailing financial condition and was intended to achieve a base under which 90% of all covered payroll would be subject to tax (to match the original 1935 act);¹⁵ increases to the taxable earnings base after 1981 returned to automatic-adjustments procedures.

Medicare was enacted in 1965, under the Social Security Amendments of 1965 (P.L. 89-97), with the HI portion of the program financed by payroll taxes. The HI tax was first levied in 1966 at a rate of 0.35% (on employee and employer, each) and the maximum taxable amount was set at the same level as Social Security's.¹⁶ The HI rate was subsequently raised periodically (reaching its current level of 1.45% in 1986) to meet the financing needs of the program. However, its base continued to be the same as Social Security's through 1990. Then, to reduce federal budget deficits, the Omnibus Budget Reconciliation Act of 1990 (P.L. 101-508) raised the HI base to $125,000. The HI base then rose automatically to $135,000 over the next two years. In 1993, as part of his plan to reduce budget deficits, President Clinton proposed that the HI base be eliminated entirely; with the Omnibus Budget Reconciliation Act of 1993 (P.L. 103-66), the HI base was removed. As there is no maximum taxable earnings amount in Medicare, Medicare financing will not be discussed further in this report.

The Taxable Earnings Base Over Time The portion of Social Security covered earnings that is subject to the payroll tax has fluctuated over time (Figure 1). When the program began in 1937, taxable earnings represented 92% of covered earnings (Table A-1). By 1965, this ratio had dropped to a low of 71%. Prior to 1972, the taxable earnings base was updated periodically by Congress, which contributed to its dramatic fluctuations in the 1950s and 1960s. Between 1972 and 1977, and since 1982, the base has been indexed to the increase in wages in the economy, which has reduced the volatility somewhat.¹⁷

Figure 1. Percentage of Earnings and Workers Below the Taxable Earnings Base, 1950-2014

Source: Figure prepared by the Congressional Research Service (CRS) based on data from the Social Security Administration, Annual Statistical Supplement, 2015.

Since the 1980s, the share of covered workers below the taxable earnings base has remained relatively stable at roughly 94%. However, the share of covered earnings that is taxed has fallen from 90% of all earnings in 1982 to 83% in 2015. The large declines in the percentage of covered earnings since the 1980s were mainly due to salaries for top earners growing faster than the pay of workers below the cap (see Figure 2), which means top earners had wage growth that was higher than average.¹⁸ Because increases in the taxable maximum are based on average wage growth, salaries for top earners increased faster than the taxable maximum. This increasing gap between top earner salaries and the taxable maximum has led to more earnings that are not covered by payroll taxes (because these earnings are above the taxable maximum), and thus a decline in the percentage of aggregate covered earnings that is below that taxable maximum.

Figure 2. Cumulative Growth in Average Inflation-Adjusted Market Income, by Market Income Group, 1979 to 2013

Source: Congressional Budget Office (CBO).

Notes: Market income consists of labor income, business income, capital gains (profits realized from the sale of assets), capital income excluding capital gains, income received in retirement for past services, and other sources of income. Government transfers are cash payments and in-kind benefits from social insurance and other government assistance programs. Those transfers include payments and benefits from federal, state, and local governments.

The Future of the Taxable Earnings Base

The taxable earnings base is increased annually by the average growth in wages, so the share of the population below the cap is expected to remain relatively stable over time. However, because of increasing earnings inequality, the share of payroll that is taxed is expected to decline even further (see "The Taxable Earnings Base Over Time"). Under the intermediate assumptions in the 2016 Trustees Report, the percentage of covered earnings that is taxable is assumed to decline to 82.5% for 2025.¹⁹ However, the Trustees Report assumes the levels will remain stable thereafter.²⁰

Projections of the Share of the Population Who Have Earned Above the Taxable Earnings Base at Least Once in Their Lifetime

Workers' earnings rise and fall during their careers, so any analysis of the population that earns above the taxable earnings base in a given year is limited in that it may miss individuals who were above the base in previous years or will have earnings above the base in the future. SSA's Office of Retirement Policy provides some projections as to how many workers are expected to ever earn above the taxable earnings base and provides a distribution of these workers by lifetime shared earnings.

In 2013, 6% of workers earned more than the taxable earnings base.²¹ In SSA's taxable earnings base fact sheet, it is projected that almost 20% of current and future covered workers (through birth cohorts born in 2020) will have at least one year of earnings above the taxable earnings base.²² Figure 3 shows how this group of workers is projected to stabilize as a percentage of the population over the next few decades. Note that the figure groups workers by five-year birth cohorts, so the workers on the right of the graph have not been born yet.

Figure 3. Covered Workers Projected to Earn Above the Taxable Earnings Base in at Least One Year During Worker's Career Source: SSA's Office of Retirement Policy, Population Profiles: Taxable Maximum Earners, https://www.ssa.gov/retirementpolicy/fact-sheets/tax-max-earners.pdf. Notes: Prior to the automatic adjustments of the taxable earnings base in 1974, the irregular changes to the taxable earnings base, coupled with regular growth in average wages, led to a decline in the real value of the taxable earnings base. A decrease in the real value of the taxable earnings base meant more workers in earlier birth cohorts would have earnings above the taxable earnings base (see the percentage of workers with earnings below Social Security base in Table A-1,). With the enactment of automatic adjustments, changes in the real value of the taxable earnings base were minimized, and the number of covered workers earning above the taxable earnings base stabilized. Impact of Raising or Eliminating the Taxable Earnings Base

Raising or removing the taxable earnings base could reduce the long-term Social Security deficit (i.e., improve the long-term solvency of the program).²³ The full impact of the policy change would depend on whether the wages above the maximum would also be counted toward benefits. Raising or eliminating the taxable earnings base while maintaining the current benefit structure, where benefits are calculated on the full contribution base, would lead to higher monthly Social Security checks for individuals who earned more than the current taxable earnings base during their careers. These higher benefit payments would lead to greater program outlays, although these expenditures would be more than offset by greater tax revenues. Although the solvency impact would be improved to a greater degree if the cap on taxes was eliminated and the cap on benefits was retained, the traditional link between contributions and benefits would be broken.

Rather than eliminate the taxable earnings base, policymakers could set it to cover a constant share of aggregate earnings. As described previously, the portion of Social Security covered earnings subject to the payroll tax has fluctuated since its inception. Larger increases in the earnings of the highest paid individuals relative to other workers have led to a decline in the share of U.S. earnings that is taxed. The proportion of earnings that is taxed is projected to continue to fall. Maintaining a consistent tax base would increase revenue and help to improve the system's solvency. Some have proposed raising the taxable earnings base to consistently tax 90% of aggregate U.S. earnings, restoring it to roughly the level of coverage in 1982 when Congress last addressed Social Security's finances. SSA and the Joint Committee on Taxation (JCT) have also used this benchmark to analyze the impact of raising the base on the Social Security trust funds and the budget.

The following sections examine the impact of raising or eliminating the taxable earnings base on individuals' taxes and benefits, the Social Security trust funds, on federal revenue, and on workers' and employers' behavior.

Impact on Individuals' Social Security Benefits If the Taxable Earnings Base Were Raised or Eliminated

SSA's Office of Retirement Policy provides projections, using the Modeling Income in the Near Term, Version 7 (MINT7) microsimulation model,²⁴ of the impact of raising or eliminating the taxable earnings base on benefits in 2030, 2050, and 2070.²⁵ The estimates for raising the amount of earnings subject to the payroll tax to 90% are based on a phase in from 2015 to 2024. The estimates for eliminating the taxable earnings base are based on the removal of the taxable earnings base in 2015. Earnings above the current taxable earnings base are included in the benefit computations. SSA also provides the change in benefits among different demographic groups and estimates of the median percentage change of benefits for all beneficiaries and affected beneficiaries.

SSA, however, does not provide projections of the changes in taxes paid by demographic groups. . Because of the linking of taxes and benefits in this proposal, the change in benefits provides an idea of how many individuals are paying more taxes, but the values are not identical. Dependents receive higher benefits when a worker pays more in taxes, so beneficiaries with higher benefits might not have paid higher taxes. Retired worker benefits represent three quarters of the affected beneficiaries; spouse and widow(er) benefits make up around a quarter of the affected beneficiaries.²⁶

Based on the projections, if the taxable earnings base was eliminated and all earnings were subject to the Social Security payroll tax, 6% of all beneficiaries would receive a higher benefit amount in 2030, with a median percentage increase in benefits of 4% for affected beneficiaries. The percentage of beneficiaries affected would be 16% in 2050 and 19% in 2070, and the median percentage change in benefits would be 6% in 2050 and 8% in 2070.²⁷ Phasing in the increase to the taxable earnings base to make 90% of earnings subject to the payroll tax leads to a median percentage change in benefits of 2% in 2030, 5% in 2050, and 7% in 2070.²⁸

The discussion of the impact on beneficiaries by group will use the projections from eliminating the taxable earnings base, to avoid complications with how the change is phased in (because the projections for raising the amount of earnings subject to the payroll tax to 90% are based on a phase in from 2015 to 2024, while the projections for eliminating the taxable earnings base are based on an immediate elimination), coupled with the fact that beneficiaries whose benefits change by less than 1% are not considered affected in the projections.²⁹

Changes by Income Group Figure 4 shows that the impact of eliminating the taxable earnings base immediately on benefits varies significantly by income group (quintiles).³⁰ Few beneficiaries in the lowest quintile would see an increase in benefits in 2030 compared with the 17% of beneficiaries in the highest quintile who would gain increased benefits if the taxable earnings base was increased. The percentage of beneficiaries affected by an increase in the taxable earnings base more than doubles in 2050. By 2070, almost half of the beneficiaries in the highest quintile would have an increase in benefits if the taxable earnings base was removed.

Figure 4. Projected Percentage of Beneficiaries Affected, by Income Quintile Source: SSA, Office of Retirement Policy; Table 1 from https://www.ssa.gov/retirementpolicy/projections/taxation/remove-tax-max-include-2030.html, https://www.ssa.gov/retirementpolicy/projections/taxation/remove-tax-max-include-2050.html, and https://www.ssa.gov/retirementpolicy/projections/taxation/remove-tax-max-include-2070.html.

Notes: The projected percentage increase of beneficiaries in the lowest quintile in 2030 shows 0% due to rounding. Income groups are defined using annual family income for the year of the projection, so some low income beneficiaries are affected by the policy if they earned above the taxable earnings base at any point in their careers. Beneficiaries must receive a greater than 1% difference in benefits in order to be considered affected.

Increases in benefit amounts among affected beneficiaries would be similar for the lower four quintiles across the three different projection years, with a median percentage change between 3% and 7%. The changes fluctuate slightly between each projection year, but remain relatively stable. Conversely, the highest quintile would see an increase in median change in benefits, from 5% in 2030 to 13% in 2070.³¹

Changes by Age The percentage of beneficiaries affected, by age, with the elimination of the taxable earnings base is shown in Figure 5. In 2030, very few people aged 80 and older would have higher benefits if the taxable earnings base was eliminated in 2015. This makes sense, because these workers would have been over 65 years old in 2015, and likely to have retired already. In 2050, the percentage of beneficiaries in the different age groups that have higher benefits would be higher. Similar to 2030, older cohorts would have fewer beneficiaries with higher benefits, although the age cut-off is 90 and older, as opposed to 80. This percentage changes in 2070, in which the largest change in beneficiaries with higher benefits would happen for the older cohorts.

Figure 5. Projected Percentage of Beneficiaries Affected, by Age Source: SSA, Office of Retirement Policy; Table 1 from https://www.ssa.gov/retirementpolicy/projections/taxation/remove-tax-max-include-2030.html, https://www.ssa.gov/retirementpolicy/projections/taxation/remove-tax-max-include-2050.html, and https://www.ssa.gov/retirementpolicy/projections/taxation/remove-tax-max-include-2070.html.

Notes: The projected percentage increase of beneficiaries in the aged 80-89 group in 2030 shows 0% due to rounding; the projected percentage increase of beneficiaries in the aged 90+ group in 2030 is a true 0%.

The change in benefit amounts among affected beneficiaries tends to increase in the later years. Older cohorts have a smaller median change in benefit amounts, as they have fewer years of contributing higher taxes. The aged 60-69 cohort in 2050 would not have had a cap on the taxable earnings base, and thus no cap on benefits, for much of their career, whereas the aged 90+ cohort has only a few years' worth of potential to earn higher benefits. By 2070, all cohorts would have had most or all of their careers without the taxable earnings base, and the median percentage change in benefits would be about 8% for all age cohorts.³²

Impact on the Social Security Trust Funds The 2016 Trustees Report projects that without any changes to current law, the OASDI trust funds would be depleted (i.e., the trust fund will have a balance of zero) in 2034. Under the intermediate assumptions of the 2016 Trustees Report, SSA actuaries calculate that it would take an immediate 2.68% increase in combined payroll taxes of taxable payroll (from 12.40% to 15.08%) to achieve solvency over the next 75 years.³³ The actuaries have estimated the impact on the trust funds of numerous policies related to the taxable earnings base.³⁴ Contributions can be increased by (1) eliminating the taxable earnings base, (2) raising the taxable earnings base such that, for example, 90% of earnings are subject to the payroll tax, or (3) taxing earnings above the current taxable earnings base, but not at the current payroll tax rate. To accommodate changes to the payroll tax, benefits associated with earnings above the current taxable earnings base can be (1) credited as they are now; (2) still count towards benefits, but at a reduced rate; or (3) not credited at all.³⁵ Table 3 presents some trust fund solvency outcomes of a few of these proposals, as estimated by SSA's Office of the Chief Actuary: the percentage of the 75-year shortfall eliminated with the proposal, and the year the combined trust fund is projected to be depleted. None of the proposals involving a change to the taxable earnings base result in long-term (75-year) solvency. The table focuses on eliminating and raising the taxable earnings base, because these two changes to the contributions include different proposals on how to change the benefits, and illustrates how contributions and benefits interact to affect the shortfall and date of trust fund depletion. A brief discussion on the impact of applying a payroll tax above the current taxable earnings base is included below. Table 3. Impact on the Social Security Trust Funds of Raising or Eliminating the Social Security Taxable Earnings Base

Options

75-year Shortfall Eliminated

Year of Trust Fund Depletion

Current Law

—

2034

1. Eliminate taxable earnings base, so all earnings are subject to payroll tax, with…

1A

No credit to benefits (retain cap for benefit calculations)

89%

2082

1B

Credit to benefits (current benefit formula)

72%

2067

1C

Adjusted benefits (new benefit formula)^a

81%

2074

Increase taxable earnings base so 90% of aggregate earnings are subject to payroll tax:

2. Phase in increase (2017-2026), with...

2A

No credit to benefits (retain cap for benefit calculations)

37%

2041

2B

Credit to benefits (current benefit formula)

29%

2041

3. Additional 2% increase in indexing until reach 90%, with...

3A

No credit to benefits (retain cap for benefit calculations)^b

28%

2036

3B

Credit to benefits (current benefit formula)^c

24%

2036

3C

Adjusted benefits (new benefit formula)^d

24%

2036

Source: SSA's Office of the Chief Actuary, Solvency Provisions: Payroll Taxes, https://www.ssa.gov/oact/solvency/provisions/payrolltax_summary.pdf.

Notes: Projections based on intermediate assumptions of 2016 Trustees Report. The Trustees Report uses three sets of assumptions to project trust fund solvency to generate a range of possibilities: low cost, intermediate cost, and high cost. The Trustees Report's primary text uses the intermediate (cost) assumptions.

a. New benefit calculation: add a bend point at current taxable earnings base and apply a formula factor of 3% to AIME above the new bend point. See footnote 35 for a summary on how Social Security benefits are calculated under current law. b. Begin increase in 2019. c. Begin increase in 2017. d. Begin increase in 2018. New benefit calculation: add a bend point at current taxable earnings base and apply a formula factor of 5% to AIME above the new bend point. See footnote 35 for a summary on how Social Security benefits are calculated under current law. Option 1A: Eliminate Taxable Earnings Base, with No Additional Benefits

The Social Security Administration's Office of the Chief Actuary analyzed three proposals that involve eliminating the taxable earnings base cap immediately, so that all earnings are taxed; these proposals differ based on how benefits are calculated to take into account earnings above the current taxable earnings base. In all three proposals, the trust fund depletion date is pushed back by at least 30 years. If no credits to benefits are provided for earnings above the current taxable earnings base (i.e., earnings above the current taxable earnings base do not count toward benefits),³⁶ the trust fund becomes depleted a little less than a decade before the long-range 75-year solvency target. The increased revenue would eliminate 89% of the projected shortfall and the program would have a projected shortfall equal to 0.30% of taxable payroll. Under this scenario, the payroll tax rate would need to be increased from 12.40% to 12.70% or other policy changes would have to be made for the system to be solvent for the next 75 years. However, the traditional link between the level of wages that is taxed and the level of wages that counts toward benefits would be broken.

Option 1B: Eliminate Taxable Earnings Base, with Current Benefits Formula

If the earnings base was completely eliminated for both employers and employees so that all earnings were taxed, but all wages counted toward benefits as they are now,³⁷ the trust fund would be depleted in 2067; 76% of the projected financial shortfall in the Social Security program would be eliminated. To achieve solvency for the full 75-year projection period under this option, the total payroll tax rate would have to be raised by an additional 0.76 percentage points (from 12.40% to 13.16%) or other policy changes would have to be made to cover the shortfall.

Under this scenario, high earners would pay higher taxes but also receive higher benefits, maintaining the traditional link between the tax paid and benefits received. The net benefit to the trust funds is still positive, as $5 in additional revenue would provide only $1 in additional benefits, on average, over their 75-year valuation period. Some annual Social Security benefit payments would be much higher than today's maximum (if claimed at full retirement age) of $32,244. To contextualize how benefits are affected by the increase in contributions, authors Reno and Lavery estimate that a worker who paid taxes on earnings of $400,000 each year would get a benefit of approximately $6,000 a month or $72,000 a year, a replacement rate of 18%; whereas someone with lifetime earnings of $1 million a year would get a monthly Social Security benefit of approximately $13,500 a month or $162,000 a year, a replacement rate of 16.2%.³⁸

Option 1C: Eliminate Taxable Earnings Base, with Adjusted Benefits

One possibility to maintain the link between contributions and benefits, but limit the benefits for high earners, is to change the benefit formula. This is generally done by adding a new bend point, with a lower conversion rate for the additional contributions from the removal of the taxable earnings base. The proposals scored by SSA that contain a provision with a new benefit formula have projections that are close to halfway between the "no additional benefit" and the "current benefit" proposals. The proposal that changes the benefit computation formula to include a new bend point at the current-law taxable earnings base and applies a formula factor of 3% for AIME above this new bend point extends the year of trust fund depletion to 2074.³⁹ This proposal eliminates 81% of the shortfall. The payroll tax would need to increase from 12.40% to 12.92% or other policy changes would have to be made for the system to be solvent for the next 75 years.

Options 2 and 3: Increase Taxable Earnings Base to Cover 90% of Earnings

Proposals from various organizations to increase the taxable earnings base to cover 90% earnings generally follow two approaches to phasing in the new taxable earnings base. One option is to phase in the increase over the next 10 years (option 2); the other option is to increase the taxable earnings base by an additional 2% on top of year-to-year indexing, until taxable earnings cover 90% of covered earnings (option 3). The second method is estimated to take around 40 years to cover 90% of earnings. None of the option 2 or option 3 proposals delays the date of trust fund depletion by more than seven years.

Phasing in the increase over the next 10 years can cover 29%-37% of the shortfall, requiring an increase of 1.68%-1.89% in the payroll tax or other policy changes would have to be made to eliminate the shortfall. ⁴⁰ Phasing in the increase by increasing the taxable earnings base by an additional 2% a year will cover approximately 25% of the shortfall, with trust fund depletion in 2034. ⁴¹ In both cases, paying higher benefits on the additional covered earnings does little to change the fund depletion date.

Taxes for Earnings Above the Taxable Earnings Base

SSA scored several proposals that apply a tax to earnings above the taxable earnings base.⁴² This is similar to eliminating the taxable earnings base cap, but reduces the amount workers have to pay on these higher earnings. Proposals generally have tax rates between 2% and 5%, with some proposals allowing for the higher tax rates to be phased in over the course of a few years. Even though most of these proposals do not include higher benefits, the only proposals that cover more than half of the shortfall have payroll tax rates of more than 6%. One proposal increases the taxable earnings base to cover 90% of earnings, with a 6.2% tax rate for earnings above the revised taxable earnings base;⁴³ this proposal has a trust fund depletion date of 2049 and covers 53% of the long-range shortfall.

Impact on Federal Revenue

Raising the taxable earnings base would lead to an increase in total federal revenues. JCT and the Congressional Budget Office (CBO) estimated that raising the wage base to cover 90% of earnings to $245,000 in 2017, would generate $273.1 billion in additional revenue over the five-year budget window (2017-2021) and more than $648 billion over the 10-year window (2022-2026).⁴⁴ The change in revenues would consist of an increase in receipts from Social Security payroll taxes, which would be off-budget, offset in part by a reduction in individual income tax revenues, which would be on-budget.⁴⁵ The reduction in income tax revenue is due to the decrease in after-tax take home pay leading to fewer hours worked and a substitution to (payroll) tax-exempt fringe benefits in lieu of wages. Outlays, via additional payments of Social Security benefits, would total about $15 billion over the 10-year period, and would be classified as off-budget.

Table 4. Effect on the Deficit: Increasing the Maximum Taxable Earnings for the Social Security Payroll Tax, Cover 90% of Aggregate Covered Earnings

(in billions of dollars)

                     

Total

 

2017

2018

2019

2020

2021

2022

2023

2024

2025

2026

2017–2021

2017–2026

Change in outlays

0.1

0.2

0.5

0.7

1.1

1.5

1.9

2.5

3.1

3.8

2.6

15.4

Change in revenues

18.6

60.1

62.5

64.7

67.3

70.1

72.4

75

77.7

80.2

273.1

648.4

Decrease in the deficit

-18.5

-59.9

-62

-64

-66.2

-68.6

-70.5

-72.5

-74.6

-76.4

-270.5

-633

Impact on Workers' and Employers' Behavior

The reaction of high-earning workers and their employers to raising or removing the taxable earnings base is unknown and was not taken into consideration in the above estimates of the distributional, trust fund, and revenue impacts.

Workers who earn more than the cap would have a reduced incentive to work as their after-tax earnings will fall.⁴⁶ However, whether these individuals would significantly reduce the amount they work is a matter of debate; each worker would face a different choice between the reduced earnings and the additional leisure time, based on the worker's individual preferences.⁴⁷ Workers earning above the current base would also have an incentive to change the form of their compensation (e.g., from earnings to fringe benefits) to avoid paying additional payroll taxes.⁴⁸

The impact of raising the base on employers of high-income earners is also unknown. Employers contribute 6.2% of workers' wages up to the taxable earnings base toward Social Security. If employers are unable to pass along the higher tax costs to workers in the form of reduced earnings, their overall labor costs will increase. Employers may react by raising prices to consumers; reducing other non-wage forms of compensation, such as health benefits or pensions; or reducing the number of workers.

Arguments For and Against Raising or Eliminating the Base

Some arguments for and against changing the Social Security taxable earnings base follow.

Arguments For

The major critique about the Social Security base is that it creates a regressive tax structure. Workers earning less than the base have a greater proportion of earnings taxed than workers whose earnings exceed it. In 2017, someone with annual earnings of $30,000 pays $1,860 in Social Security taxes, or 6.2% of his or her earnings (ignoring the employer share of the tax). However, because the tax is levied on only the first $127,200 in earnings, someone earning $200,000 a year pays $7,886, or 3.9%, of his or her earnings.⁴⁹

Supporters of changing the wage base point out that only 6% of workers have earnings above the base in any given year. However, because of rising earnings inequality, the amount of their earnings that escapes taxation has risen from 12% to 15% since 1991. They therefore contend that the current tax structure favors a small group of the higher-earning workers in society.

They also point out that the overall employee tax rate rose by 25%, from 6.13% in 1980 to 7.65% in 1990 (counting the Medicare portion) and suggest that this increase is one of the main reasons for a disproportionate rise in the aggregate federal tax burden on lower- and middle-income people over that decade.⁵⁰ They further maintain that for most workers, Social Security and Medicare taxes (counting the employer share, which they view as foregone wages) are now greater than their income taxes.

Supporters argue that subjecting a larger percentage of earnings to the payroll tax would also adjust for the higher life expectancies of high earners.⁵¹ On average, people with more education and higher earnings live longer than those with less education and lower earnings, and this difference has been growing over time. The impact on the Social Security program is that higher-earning individuals receive benefits for more years over their lifetimes making the system less progressive.⁵² Supporters claim that raising the taxable earnings base would make a reasonable adjustment for the faster-than-average life expectancy gains among high earners.

Among supporters of changing the current base, there is disagreement regarding how high the base should be raised or if other changes should be made to tax income above the base. Several proposals would not eliminate the base entirely but raise it to cover 90% of taxable wages, restoring the level that was set in the 1977 amendments to the Social Security Act. Other options would be to remove the cap, but lower the tax rate on those higher earnings or tax employers and employees at different rates above the current base.⁵³ Others have called for broadening the sources of income that are taxed beyond earnings.⁵⁴ Proponents of these ideas argue that they would close a significant portion of Social Security's long-range deficit without subjecting upper-middle income individuals to sizeable increases in their marginal tax rates.

Arguments Against

Those who support keeping the base as it is point out that although the structure of the payroll tax may be regressive, it is offset by the progressive calculation of benefits.⁵⁵

Supporters further maintain that its critics fail to take into account the effect of other tax and transfer programs targeted to low earners. They point out that mitigating the Social Security tax bite was part of the motivation for creating the earned income tax credit (EITC), which provides an income tax credit on earnings up to $53,930 in 2017 for married workers with three or more children (up to $20,600 for married workers without children).⁵⁶ They also point out that low-income families receive a greater share of government transfer payments that are not subject to Social Security payroll taxes. They argue that the combination of these factors mitigates the flat-rate nature of the tax at lower earnings levels, and that for most other workers the tax is proportional (because it is flat rate). It is only at the upper end of the income spectrum that it takes on a regressive appearance.⁵⁷

Critics also argue that raising the cap will serve as a disincentive to work and could serve as a drain on the economy.⁵⁸ Because additional work effort would generate less after-tax income, supporters claim that workers faced with this higher marginal rate would either reduce their hours or avoid the tax by changing the form of their compensation.

There are additional arguments against eliminating the taxable earnings base. For example, maintaining a cap makes Social Security seem less like general purpose taxation. Another argument is that the system needs support from people of all earnings levels, and that the larger benefits that high earners would receive would represent a poor return for the higher taxes they would pay. Some question the wisdom of paying large benefits to higher-income people, arguing that the purpose of the program is to provide a floor of protection for retirement, not large benefits for those who can save on their own. These people contend that eliminating the base would raise public cynicism about a publicly financed system that pays enormous benefits to people who already are well off.⁵⁹

Appendix. Taxable Earnings Bases: Detailed Table Table A-1. Social Security and Medicare Tax Rates and Taxable Earnings Bases, 1937-2017

Year

Tax Rates

Maximum Taxable Earnings

Percentage of Workers with Earnings Below Social Security Base

Percentage of Covered Earnings Below Social Security Base

  Social Security^a HI^a

Self-employed (Social Security and HI combined)

Social Security

HI

   

1937

1.000

—

—

$3,000

—

96.9

92.0

1940

1.000

—

—

3,000

—

96.6

92.4

1945

1.000

—

—

3,000

—

86.3

87.9

1950

1.500

—

—

3,000

—

71.1

79.7

1951

1.500

—

2.25

3,600

—

75.5

81.1

1952

1.500

—

2.25

3,600

—

72.1

80.5

1953

1.500

—

2.25

3,600

—

68.8

78.5

1954

2.000

—

3.0

3,600

—

68.4

77.7

1955

2.000

—

3.0

4,200

—

74.4

80.3

1956

2.000

—

3.0

4,200

—

71.6

78.8

1957

2.250

—

3.375

4,200

—

70.1

77.5

1958

2.250

—

3.375

4,200

—

69.4

76.4

1959

2.500

—

3.75

4,800

—

73.3

79.3

1960

3.000

—

4.5

4,800

—

72.0

78.1

1961

3.000

—

4.5

4,800

—

70.8

77.4

1962

3.125

—

4.7

4,800

—

68.8

75.8

1963

3.625

—

5.4

4,800

—

67.5

74.6

1964

3.625

—

5.4

4,800

—

65.5

72.8

1965

3.625

—

5.4

4,800

—

63.9

71.3

1966

3.850

0.35

6.15

6,600

6,600

75.8

80.0

1967

3.900

0.5

6.4

6,600

6,600

73.6

78.1

1968

3.800

0.6

6.4

7,800

7,800

78.6

81.7

1969

4.200

0.6

6.9

7,800

7,800

75.5

80.1

1970

4.200

0.6

6.9

7,800

7,800

74.0

78.2

1971

4.600

0.6

7.5

7,800

7,800

71.7

76.3

1972

4.600

0.6

7.5

9,000

9,000

75.0

78.3

1973

4.850

1.0

8.0

10,800

10,800

79.7

81.8

1974

4.950

0.9

7.9

13,200

13,200

84.9

85.3

1975

4.950

0.9

7.9

14,100

14,100

84.9

84.4

1976

4.950

0.9

7.9

15,300

15,300

85.1

84.3

1977

4.950

0.9

7.9

16,500

16,500

85.2

85.0

1978

5.050

1.0

8.1

17,700

17,700

84.6

83.8

1979

5.080

1.05

8.1

22,900

22,900

90.0

87.3

1980

5.080

1.05

8.1

25,900

25,900

91.2

88.9

1981

5.350

1.3

9.3

29,700

29,700

92.4

89.2

1982

5.400

1.3

9.35

32,400

32,400

92.9

90.0

1983

5.400

1.3

9.35

35,700

35,700

93.7

90.0

1984

5.700

1.3

14.0

37,800

37,800

93.6

89.3

1985

5.700

1.35

14.1

39,600

39,600

93.5

88.9

1986

5.700

1.45

14.3

42,000

42,000

93.8

88.6

1987

5.700

1.45

14.3

43,800

43,800

93.9

87.6

1988

6.060

1.45

15.02

45,000

45,000

93.5

85.8

1989

6.060

1.45

15.02

48,000

48,000

93.8

86.8

1990

6.200

1.45

15.3

51,300

51,300

94.3

87.2

1991

6.200

1.45

15.3

53,400

125,000

94.4

87.8

1992

6.200

1.45

15.3

55,500

130,200

94.3

86.8

1993

6.200

1.45

15.3

57,600

135,000

94.4

87.2

1994

6.200

1.45

15.3

60,600

^b

94.6

87.1

1995

6.200

1.45

15.3

61,200

^b

94.2

85.8

1996

6.200

1.45

15.3

62,700

^b

93.9

85.7

1997

6.200

1.45

15.3

65,400

^b

93.8

85.1

1998

6.200

1.45

15.3

68,400

^b

93.7

84.5

1999

6.200

1.45

15.3

72,600

^b

93.9

83.9

2000

6.200

1.45

15.3

76,200

^b

93.8

83.2

2001

6.200

1.45

15.3

80,400

^b

94.0

84.7

2002

6.200

1.45

15.3

84,900

^b

94.6

86.1

2003

6.200

1.45

15.3

87,000

^b

94.5

85.9

2004

6.200

1.45

15.3

87,900

^b

94.1

84.8

2005

6.200

1.45

15.3

90,000

^b

93.9

84.1

2006

6.200

1.45

15.3

94,200

^b

94.0

83.4

2007

6.200

1.45

15.3

97,500

^b

93.9

82.6

2008

6.200

1.45

15.3

102,000

^b

94.0

83.6

2009

6.200

1.45

15.3

106,800

^b

94.5

85.2

2010

6.200

1.45

15.3

106,800

^b

94.3

84.1

2011

6.200

1.45

15.3

106,800

^b 93.8^c 83.3^c

2012

6.200

1.45

15.3

110,100

^b 93.9^c 82.5^c

2013

6.200

1.45

15.3

113,700

^b 94.0^c 83.4^c

2014

6.200

1.45

15.3

117,000

^b

—

82.7^c

2015

6.200

1.45

15.3

118,500

^b

—

—

2016

6.200

1.45

15.3

118,500

^b

—

—

2017

6.200

1.45

15.3

127,200

^b

—

—

Source: Tables 2.A3 and 4.B1, Social Security Bulletin, Annual Statistical Supplement, 2015, at http://www.ssa.gov/policy/docs/statcomps/supplement/2015.

Notes: The original Social Security Act only included Old Age Insurance (OAI), coverage expanded to cover dependents and survivors in 1940 (Old Age and Survivors Insurance, or OASI), and Disability Insurance (DI) was created in 1957, leading to the combined Old Age, Survivors, and Disability Insurance (OASDI).

a. Same for employer except 1984—employees received 0.3% credit (not reflected above). Various credits also applied to self-employed (not reflected above) for 1984-1989 period. b. Upper limit on earnings subject to Hospital Insurance (HI) taxes was repealed by Omnibus Budget Reconciliation Act (OBRA) 1993. c. Estimates based on preliminary data.

Author Contact Information

Acknowledgments

Former Analyst Debra B. Whitman originally authored an earlier version of this report.

Footnotes

1.

In the Social Security Act and the Social Security Administration's Program Operations Manual System, the formal term used is contribution and benefit base. It is also commonly referred to as the taxable maximum (or tax max).

2.

Social Security Administration (SSA), Office of the Chief Actuary, Social Security Program Fact Sheet for 2016, available at https://www.ssa.gov/OACT/FACTS/fs2016_06.pdf. Some workers (approximately 6%) are exempt from Social Security payroll taxes and are therefore not "covered" by Social Security. From this point forward, all references to earnings are covered earnings and workers are covered workers. Workers who are exempt from Social Security payroll taxes are primarily (1) state and local government workers, (2) certain religious group-employed workers, or (3) certain non-citizen workers.

3.

The reason for the two-year lag in reflecting increases in average wages in the taxable earnings base is that average wages for the year immediately prior to the year of the increase are not known at the time of the announcement (e.g., the increase in the base from 2014 to 2015, announced in 2014, is based on the increase in average wages from 2012 to 2013; in contrast, the 2014 cost-of-living adjustment (COLA) for 2015 benefits is based on the change in prices from 2013Q3 to 2014Q3). When there is no COLA, the reference year used for the wage indexing is maintained, similar to how the reference year for COLA computations is maintained after a year without a COLA. For example, because there was no COLA in 2015 for 2016 benefits, instead of using 2015Q3 as the reference year for calculating the COLA from 2016 to 2017 (changes from 2015Q3 prices to 2016Q3 prices), the COLA used 2014Q3 as the reference year (the reference year of the 2015 COLA for 2016 benefits). Thus, the reference year used for the 2017 taxable earnings base was 2013, not 2014. For more details on COLAs, see CRS Report 94-803, Social Security: Cost-of-Living Adjustments.

4.

Maximum Social Security contribution calculation: $127,200 x 6.2% = $7,886 and $127,200 x 12.4% = $15,772.

5.

The Social Security benefit formula calculates benefits based on a worker's highest 35 years of earnings. Monthly benefits are reduced if a worker claims benefits before his or her full retirement age; a worker receives credits that increase his or her monthly benefits if he or she claims benefits after full retirement age. See CRS Report R43542, How Social Security Benefits Are Computed: In Brief.

6.

Social Security Administration, "Fact Sheet: 2017 Social Security Changes," https://www.ssa.gov/news/press/factsheets/colafacts2017.pdf.

7.

SSA, Annual Statistical Supplement, 2015, tables 4B.1, 4.B4, 4.B7, and 4B.9, https://www.ssa.gov/policy/docs/statcomps/supplement/2015/4b.pdf.

8.

Prior to the enactment of the Social Security Act, public assistance for the elderly was generally in the form of state welfare pensions. However, these state pension plans were limited: many had not existed prior to 1930, about 20 states still lacked a public old-age pension program by 1935, and about 3% of the elderly were receiving benefits, of which the average benefit amount was 65 cents a day. For more details, see the "State Old-Age Pensions" section of Historical Background and Development of Social Security, Pre-Social Security Period at https://www.ssa.gov/history/briefhistory3.html.

9.

The maximum for a worker was to be $3,000 per year per employer, so that, under the original legislation enacted in 1935, a worker could have paid taxes on more than $3,000 in earnings per year (and received benefits from all such wages) if he or she worked for more than one employer.

10.

For example, see Sen. William Benton, "Social Security Amendments of 1950," Senate debate, Congressional Record, vol. 96, part 7 (June 19, 1950), p. 8812; and Sen. Ralph Yarborough, "Social Security Amendments of 1958," Senate debate, Congressional Record, vol. 104, part 14 (August 16, 1958), p. 17967.

11.

For example, see "Reports of the 1979 Advisory Council on Social Security," Social Security Bulletin, vol. 43, no. 2 (February 1980), p. 4.

12.

For example, see U.S. Congress, Senate Special Committee on Aging, Developments in Aging, 1970, committee print, prepared by Frank Church, 91^st Cong., 1^st sess., March 23, 1971, S.Rept. 92-46, p. 1 and U.S. Congress, House Committee on Ways and Means, Social Security Amendments of 1971, committee print, prepared by Wilbur Mills, 92^nd Cong., 1^st sess., May 26, 1971, H.Rept. 92-231, pp. 40, 128.

13.

For example, see Rep. H. Allen Smith, "Social Security Amendments of 1971," House debate, Congressional Record, vol. 117, part 16 (June 21, 1971), p. 21084.

14.

For a historical series of the "old law" base, see Social Security Administration, "Old-law Base and Year of Coverage," at http://www.socialsecurity.gov/OACT/COLA/yoc.html.

15.

For example, see Rep. William Cotter, "Providing for Consideration of H.R. 9346, Social Security Financing Amendments of 1977," House debate, Congressional Record, vol. 123, part 27 (October 26, 1977), p. 35255.

16.

The same maximum taxable amount was set for the self-employed when they were covered in 1951 and for the Disability Insurance (DI) portion of the tax when it was first levied in 1957.

17.

As described earlier, to raise revenue, Congress raised the taxable earnings base, with the Social Security Amendments of 1977 (P.L. 95-216), to a level that would cover 90% of aggregate earnings by 1982.

18.

At least some of this decline and subsequent increase in the ratio after 2000 is believed to be due to stock option activity surrounding the stock market bubble in 2000 and is not likely to recur. See Social Security Administration, The 2005 Annual Report of the Board of Trustees of the Federal Old-Age and Survivors Insurance and Federal Disability Insurance Trust Funds, p.104, https://www.ssa.gov/oact/tr/TR05/tr05.pdf. For more on differences in wage growth, see CRS Report R44705, The U.S. Income Distribution: Trends and Issues.

19.

The Trustees Report is the colloquial term for the Annual Report of the Board of Trustees of the Federal Old-Age and Survivors Insurance and Federal Disability Insurance Trust Funds, an annual report that details the financial outlook of the Old-Age, Survivors, and Disability Insurance (OASDI) trust funds. The board of trustees is composed of the Secretary of the Treasury, the Secretary of Labor, the Secretary of Health and Human Services, the Commissioner of Social Security, and two public trustees. The report makes demographic and economic assumptions to project trust fund solvency. To generate a range of possibilities, there are three sets of assumptions: low-, intermediate-, and high-cost. The low-cost set of assumptions is meant to show a scenario that is favorable for the program's financial status. The high-cost set of assumptions is meant to show a scenario that is unfavorable for the program's financial status. Most projections based on the Trustees Reports, including the Trustees Reports' primary text, use the intermediate assumptions.

20.

SSA, The 2016 Annual Report of the Board of Trustees of the Federal Old-Age and Survivors Insurance and Federal Disability Insurance Trust Funds, p. 146, https://www.ssa.gov/oact/tr/2016/tr2016.pdf.

21.

Social Security Administration, Annual Statistical Supplement 2009, http, 2015, https://www.ssa.gov/policy/docs/statcomps/supplement/2009/4b.html#table4.b1. (Hereinafter referred to as SSA Statistical Supplement, 2009.)

11.

The Urban Institute's Dynamic Simulation of Income Model (Dynasim) is a computer model that uses survey data to project earnings, demographic changes, retirement income, and Social Security benefits through the year 2050. For more information about the model, how it works, and how to interpret results, see CRS Report RL33840, Options to Address Social Security Solvency and Their Impact on Beneficiaries: Results from the Dynasim Microsimulation Model, by [author name scrubbed] et al.

12.

SSA Statistical Supplement, 2009.

13.

The share of the population affected by this policy is influenced by the way the Dynasim model projects an individual's earnings. There is a significant amount of year-to-year variation in the projection of each individual's earnings.

14.

The Dynasim model projections are consistent with current data on wage inequality. In 2004, the top 1% of earners were paid 11% of aggregate earnings (source: CRS analysis of the March 2005 Current Population Survey).

15.

There is precedent for this proposal. When the hospital insurance (HI) tax was levied in 1966 the maximum taxable amount was set the same as for Social Security. As part of the Omnibus Budget Reconciliation Act of 1993 (P.L. 103-66), the HI base was removed.

16.

CRS estimates of the impact of this and other reform proposals, including raising the base to cover 90% of taxable earnings, are also available based on beneficiaries' socioeconomic status (including ethnicity, education, and marital status). (CRS Report RL33841, Options to Address Social Security Solvency and Their Impact on Beneficiaries: Results from the Dynasim Microsimulation Model—Detailed Distributional Tables, by [author name scrubbed] et al.)

17.

Note that the income groups are defined in 2035 using family income after an individual claims disability, retirement, survivor, or spousal benefits. Thus, some low income beneficiaries are affected by the policy if they earned above the taxable wage base at any point in their careers.

18.

The projections in this section were done using the assumptions of the 2005 Trustees Report to match the estimates in Table 4, which are the most recent estimates available for these options.

19.

Social Security Administration, Estimated Financial Effects of "A Nonpartisan Approach to Reforming Social Security - A Proposal Developed by Jeffrey Liebman, Maya MacGuineas and Andrew Samwick"—INFORMATION, Memorandum, dated November 17, 2005, http://www.ssa.gov/OACT/solvency/Liebman_20051117.pdf.

20.

Social Security Administration, Estimated OASDI Long-Range Financial Effects of Several Provisions Requested by the Social Security Advisory Board, Memorandum, dated August 10, 2005, available at http://www.ssa.gov/OACT/solvency/provisions/index.html.

21.

Calculations are for 2005 from Reno and Lavery, Options to Balance Social Security Funds, February 2005. Benefits this high would be extremely rare as few individuals earn above the taxable wage base for their entire career.

22.

Congressional Budget Office, Budget Options, Revenue Option 39: Increase the Upper Limit for Earnings Subject to the Social Security Payroll Tax, February 2007, at http://www.cbo.gov. Note that the estimates by the actuaries at the Social Security Administration (SSA) and the Joint Committee on Taxation (JCT) differ slightly due to different assumptions. SSA assumes the maximum wage base will be adjusted each year to keep taxable wages at a constant percent of wages whereas the JCT assumes it will be a one-time increase with adjustments only for inflation thereafter. JCT estimates also account for the effects on all sources of revenue, including changes to income taxes and Medicare taxes.

23.

The response by high earners may depend on whether the wage base is raised slightly or completely eliminated.

24.

For a more detailed discussion of this debate, see CRS Report RL33943, Increasing the Social Security Payroll Tax Base: Options and Effects on Tax Burdens, by [author name scrubbed].

25.

See Martin Sullivan, "Budget Magic and the Social Security Tax Cap," Tax Notes, March 14, 2005.

26.

See CRS Report RL32693, Distribution of the Tax Burden Across Individuals: An Overview, by [author name scrubbed].

27.

See Peter A. Diamond and Peter R. Orzag, Saving Social Security: A Balanced Approach, Brookings Institution, 2004.

28.

The Social Security benefit formula is thought to be progressive in that the monthly benefits of low-wage earners replace a greater proportion of their earnings than do the monthly benefits of high-wage earners.

29.

For a study of how the effective tax rates paid by different income groups would change under such a proposal, see CRS Report RL33943, Increasing the Social Security Payroll Tax Base: Options and Effects on Tax Burdens, by [author name scrubbed].

30.

Robert C. Posen, "PIN Money," Wall Street Journal, January 9, 2007.

31.

Citizens for Tax Justice, An Analysis of Eliminating the Cap on Earnings Subject to the Social Security Tax and Related Issues, November 30, 2006, at http://www.ctj.org/pdf/socialsecuritytaxearningscapnov2006.pdf.

32.

See D. Mark Wilson, Removing the Social Security's Tax Cap on Wages Would Do More Harm Than Good, The Heritage Foundation, October 18, 2001supplement/2015/supplement15.pdf. 22.

The Social Security Administration's Office of Retirement Policy Population Profiles: Taxable Maximum Earners, https://www.ssa.gov/retirementpolicy/fact-sheets/tax-max-earners.pdf.

23.

There is precedent for eliminating the taxable earnings base. When the hospital insurance (HI) tax was levied in 1966 the maximum taxable amount was set the same as for Social Security. As part of the Omnibus Budget Reconciliation Act of 1993 (P.L. 103-66), the HI base was removed.

24.

The Modeling Income in the Near Term, Version 7 (MINT7) is a microsimulation that matches Social Security's administrative records to survey data from Survey of Income and Program Participation (SIPP), a detailed Census Bureau survey. Economic, demographic, and programmatic assumptions are based on the 2012 Trustees Report. For more information on the MINT7 model, see the Office of Retirement Policy's description of the model at https://www.ssa.gov/retirementpolicy/projection-methodology.html and Urban Institute's primer at http://www.urban.org/research/publication/primer-modeling-income-near-term-version-7-mint7.

25.

Urban Institute provides an alternative set of projections of the effect of raising the taxable earnings base on annual per capita income (including annuity and cash income) by source and taxes by source of individuals aged 62 and older through 2065 in 10-year increments. The changes include increasing the taxable earnings base to $150,000 over a 2-year period, increasing the taxable earnings base to $180,000 over a 2-year period, and increasing the taxable earnings base to cover 90% of payroll over a 10-year period. All changes begin in 2016. These projections are made using the Dynamic Simulation of Income Model (DYNASIM) microsimulation, "taking a representative sample of individuals and families and ages them year by year, simulating key demographic, economic and health events... These transitions are based on probabilities generated by carefully calibrated equations estimated from nationally representative household survey data" (DYNASIM: Projecting American's Future Well-Being, September 2015). For more details on the DYNASIM model, see http://www.urban.org/sites/default/files/publication/65826/2000370-DYNASIM-Projecting-Older-Americans-Future-Well-Being.pdf.

26.

SSA, Office of Retirement Policy; Table 1 from https://www.ssa.gov/retirementpolicy/projections/taxation/remove-tax-max-include-2030.html and https://www.ssa.gov/retirementpolicy/projections/taxation/90-percent-tax-max-include-2030.html.

27.

SSA, Office of Retirement Policy; Table 1 from https://www.ssa.gov/retirementpolicy/projections/taxation/remove-tax-max-include-2030.html, https://www.ssa.gov/retirementpolicy/projections/taxation/remove-tax-max-include-2050.html, and https://www.ssa.gov/retirementpolicy/projections/taxation/remove-tax-max-include-2070.html.

28.

SSA, Office of Retirement Policy; Table 1 from https://www.ssa.gov/retirementpolicy/projections/taxation/90-percent-tax-max-include-2030.html,

https://www.ssa.gov/retirementpolicy/projections/taxation/90-percent-tax-max-include-2050.html, and

https://www.ssa.gov/retirementpolicy/projections/taxation/90-percent-tax-max-include-2070.html

29.

The same number of beneficiaries would be affected by either raising or eliminating the taxable earnings base, assuming identical implementation schedule (immediately or phased in): a worker earning above the current taxable maximum will pay more in payroll taxes (and receive more benefits) regardless of whether the taxable earnings base was increased or eliminated. However, a gradual phase in could result in small increases to benefits that are not considered affected in the projections due to increases in benefits of less than 1% not counting as having a change in benefits. Because of this, the percentage of beneficiaries with higher benefits after phasing in benefits is consistently lower than the projections for when the taxable earnings base is eliminated immediately.

30.

Income groups are defined using annual family income for the year of the projection (2030, 2050, and 2070) after an individual claims disability, retirement, survivor, or spousal benefits. Households are divided up into five groups (quintiles) based on their income; the 20% of households with the lowest incomes are in the first quintile, the 20% of households with the next lowest incomes are in the second quintile, and so on.

31.

SSA, Office of Retirement Policy; Table 1 from https://www.ssa.gov/retirementpolicy/projections/taxation/remove-tax-max-include-2030.html, https://www.ssa.gov/retirementpolicy/projections/taxation/remove-tax-max-include-2050.html, and https://www.ssa.gov/retirementpolicy/projections/taxation/remove-tax-max-include-2070.html.

32.

Ibid.

33.

Section 201(c) of the Social Security Act requires the Board of Trustees to "report to the Congress not later than the first day of April of each year on the operation and status of the Trust Funds during the preceding fiscal year and on their expected operation and status during the ensuing five fiscal years.... " The 75-year projection period was recommended by the 1965 Social Security Advisory Council (rather than to project "into perpetuity"), and the 75-year measuring period first appeared in the 1965 Trustees Report. Part of the reasoning of the 75-year projection was that 75 years "would span the lifetime of virtually all covered persons living on the valuation date" (see https://www.ssa.gov/history/reports/65council/65part1.html).

34.

Projections from various proposals as analyzed by the Social Security Administration's Office of the Chief Actuary can be found at https://www.ssa.gov/oact/solvency/provisions/index.html.

35.

Benefits are calculated by taking a worker's summary of lifetime covered (payroll taxed) earnings called the average indexed monthly earnings (AIME), which is the average of the 35 highest indexed-earning years divided by 12, and putting it into a formula to get the primary insurance amount (PIA). To compute a worker's PIA, the worker's AIME is divided into three segments, based on two dollar thresholds, known as bend points, and three different formula factors—90%, 32%, and 15%—are applied to the three different segments of the worker's AIME to compute the basic monthly benefit; 90% is applied to the lowest segment, 32% to the middle, and 15% to the highest. For more on how benefits are computed, see CRS Report R43542, How Social Security Benefits Are Computed: In Brief,.

36.

An example of this proposal can be found in the Fair Adjustment and Income Revenue for Social Security Act (H.R. 1984, 114^th Cong.).

37.

This proposal can be found in Virginia Reno and Joni Lavery, Fixing Social Security: Adequate Benefits, Adequate Financing, National Academy of Social Insurance, October 2009.

38.

Calculations are for 2005 from Virginia Reno and Joni Lavery, Options to Balance Social Security Funds, February 2005. The current monthly benefits from the respective examples will be higher, due to increases to bend points. Benefits this high would be rare because few workers earn above the taxable earnings base for their entire career.

39.

This proposal can be found in Virginia Reno and Joni Lavery, Fixing Social Security: Adequate Benefits, Adequate Financing, National Academy of Social Insurance, October 2009.

40.

A similar proposal can be found in Liebman, MacGuineas, and Samwick, Nonpartisan Social Security Reform Plan, December 2005, at https://www.hks.harvard.edu/jeffreyliebman/lms_nonpartisan_plan_description.pdf.

41.

Proposals that include a phase in by increasing the taxable earnings base by an additional 2% a year include a proposal by the Bipartisan Policy Center Debt Reduction Task Force, Restoring America's Future, November 2010; and a proposal by the National Commission on Fiscal Responsibility and Reform, The Moment of Truth: Report of the National Commission on Fiscal Responsibility and Reform, December 2010.

42.

See Letter from Stephen C. Goss, chief actuary, to Johnson, Brady, and Ryan, May 12, 2010, https://www.ssa.gov/oact/solvency/JohnsonBradyRyan_20100512.pdf; and Letter from Stephen C. Goss, chief actuary, to Begich and Murray, June 10, 2014, https://www.ssa.gov/oact/solvency/BegichMurray_20140610.pdf.

43.

Proposal offered in U.S. Congress, Senate Special Committee on Aging, Social Security Modernization: Options to Address Solvency and Benefit Adequacy, 111^th Cong., 2^nd sess., S.Rept. 111-187, May 13, 2010.

44.

Congressional Budget Office (CBO), Budget Options, Revenue Option 20: Increase the Maximum Taxable Earnings for the Social Security Payroll Tax, December 2016, at https://www.cbo.gov/sites/default/files/114th-congress-2015-2016/reports/52142-budgetoptions.pdf.

45.

From 1935 to 1968 and since 1986, the Social Security program has been off-budget. The program is self-financing, and the Social Security trust funds are displayed separately in the federal budget. This means that SSA is, for the most part, not subject to the standard budget and appropriations process (the exception is the administrative budget for SSA, which SSA must present as a budget request and is subject to the standard review procedures of the Office of Management and Budget and the budget and appropriations committees of Congress). The program can be and has been a component of unified budget calculations. For more details on the relationship between the Social Security trust funds and the federal budget, see "Research Note #20: The Social Security Trust Funds and the Federal Budget," available at https://www.ssa.gov/history/BudgetTreatment.html.

46.

The response by high earners may depend on whether the wage base is raised slightly or completely eliminated.

47.

Gender, marital status, and wage all play a role in the labor supply decision. For a review of how these dynamics interact to affect an individual's decision to work, see Robert McClelland and Shannon Mok, A Review of Recent Research on Labor Supply Elasticities, CBO, Working Paper no. 2012-12, October 2012, https://www.cbo.gov/sites/default/files/112th-congress-2011-2012/workingpaper/10-25-2012-Recent_Research_on_Labor_Supply_Elasticities_0.pdf.

48.

See Martin Sullivan, "Budget Magic and the Social Security Tax Cap," Tax Notes, March 14, 2005.

49.

See Center on Budget and Policy Priorities, Policy Basics: Federal Payroll Taxes, March 23, 2016, at http://www.cbpp.org/research/federal-tax/policy-basics-federal-payroll-taxes.

50.

See Mike Bostock, Matthew Ericson, and Robert Gebeloff, "How the Tax Burden has Changed," The New York Times, November 30, 2012, at http://www.nytimes.com/interactive/2012/11/30/us/tax-burden.html?_r=0.

51.

See Peter Diamond and Peter Orzag, Saving Social Security: A Balanced Approach, Brookings Institution, 2004.

52.

The Social Security benefit formula is thought to be progressive in that the monthly benefits of low-wage earners replace a greater proportion of their earnings than do the monthly benefits of high-wage earners.

53.

Robert C. Posen, "PIN Money," Wall Street Journal, January 9, 2007.

54.

Citizens for Tax Justice, An Analysis of Eliminating the Cap on Earnings Subject to the Social Security Tax and Related Issues, November 30, 2006, at http://www.ctj.org/pdf/socialsecuritytaxearningscapnov2006.pdf.

55.

Kip Hagopian and Lee E. Ohanian, "Payroll Taxes are 'Regressive'? Time to Rethink that Idea," The Wall Street Journal, October 29, 2012.

56.

For example, see Sen. Robert C. Byrd, "Revenue Act of 1978," Senate debate, Congressional Record, vol. 124, part 25 (October 5, 1978), p. 33955.

57.

See D. Mark Wilson, A Look at Who Pays the Payroll Tax, The Heritage Foundation, August 30, 2001, at http://www.heritage.org/research/reports/2001/08/a-look-at-who-pays-the-payroll-tax.

58.

See D. Mark Wilson, Removing the Social Security's Tax Cap on Wages Would Do More Harm Than Good, The Heritage Foundation, October 17, 2001, at http://www.heritage.org/research/reports/2001/10/removing-social-securitys-tax-cap-on-wages.

59. See Neil Howe and Richard Jackson, Can Hiking the Max Tax Save Social Security, The Concord Coalition, September 10, 1998, at http://www.concordcoalition.org/publications/facing-facts/1998/0911/can-hiking-max-tax-save-social-security.