Order Code 97-116 EPW
Updated January 20, 2004
CRS Report for Congress
Received through the CRS Web
Social Security: Raising or Eliminating
the Taxable Earnings Base
Laura Haltzel
Specialist in Social Legislation
Domestic Social Policy Division
Summary
Social Security taxes are levied on earnings up to a maximum level set each year.
In 2004, this maximum — or what is referred to as the taxable earnings base — is
$87,900. There is no similar base for the Medicare Hospital Insurance (HI) portion of
the tax; all earnings are taxable for HI purposes. Elimination of the HI base was
proposed by President Clinton and enacted in 1993, effectively beginning in 1994.
Recently others have proposed that the base for Social Security be raised or eliminated
as well. They complain that taxing earnings only up to a certain level creates a
regressive tax. They point out that the 94% of all workers whose earnings fall below
this level have a greater proportion of earnings taxed than the 6% whose earnings exceed
it. They contend that the revenues generated by raising the level — estimated at almost
$100 billion in 2004 if all earnings were taxed — could be used to reduce Social
Security taxes for lower wage earners or help reduce the long-range actuarial shortfall
in Social Security. Those who support retaining the base in its current form point out
that Social Security’s benefit formula favors low-wage earners by replacing a greater
proportion of their earnings than it does for higher wage earners. They argue that the
progressive benefits mitigate the regressive tax. They maintain that eliminating the base
completely would cause enormous benefits to be paid to millionaires (since benefits are
based on one’s earnings record), weaken pensions and other forms of private savings,
and ultimately erode public support for the program.1
Background
Social Security was enacted in 1935, and the Social Security 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. From then on, the rate and taxable maximum were
increased numerous times to help meet the financing needs of the program and to keep
the taxable maximum up to date with changing earnings levels. Medicare was enacted
1 This report was written by former CRS staffer Geoffrey Kollmann.
Congressional Research Service ˜ The Library of Congress

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in 1965, and the hospital insurance (HI) portion of the program also was financed with
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 same level as Social
Security’s.2 The HI rate was subsequently raised periodically (reaching its current level
of 1.45% in 1986) to meet the financing needs of the program, but its base continued to
be the same as Social Security’s through 1990. In 1991, as a result of the Omnibus
Budget Reconciliation Act of 1990 (P.L. 101-518), the HI base was raised to $125,000
(in lieu of the $53,400 level set that year for Social Security), and in 1994, as a result of
the Omnibus Budget Reconciliation Act of 1993 (P.L. 103-66), it was eliminated.
The base has been raised 38 times for Social Security and 24 times for HI. Since
1982, the Social Security 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. An increase in the base from $87,000 in 2003 to
$87,900 in 2004 was derived from an increase in average wages from 2000 to 2001.
Origin of the Base
People often ask why is there
is a maximum amount of earnings
Year 2004 Social Security and Medicare Tax
subject to the tax — why aren’t all
Rates and Maximum Taxable Earnings
earnings taxed?
Social Security tax rate*
6.20%
Hospital Insurance tax rate*
1.45%
In 1935, the designers of
Social Security — President
Maximum taxable earnings:
Franklin Roosevelt’s Committee
Social Security
$87,900
on Economic Security — did not
Hospital Insurance
no maximum
recommend a maximum level of
Percent of covered earnings
taxable earnings in its plan, and
above the base (not taxed):
the draft bill that President
Social Security **
17%
Roosevelt sent to the Hill did not
Hospital Insurance
(all earnings are taxed)
include one. The bill emphasized
*Employee and employer each; double for self-employed,
who was to be covered by the
but certain adjustments and income tax deductions apply.
system, not how much wages
should be taxed. Being in the
**Represents estimate for 2001; from 2002 Social Security
midst of the Depression, the
Annual Statistical Supplement.
Administration’s attention was on
the large number of aged people
living in poverty. Its goal in proposing a Social Security program was to complement
public assistance measures (Old-Age Assistance) in its plan. 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
2 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.

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from coverage, i.e., $3,000 on an annual basis). 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 it set at $3,000 per year.3 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 them meant that they would not pay
the tax where 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 progressive 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 over 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 lead to higher benefits (since benefits are
based on a worker’s earnings). Proponents argued that the base needed to be raised to
reflect wage or price growth so that the benefits of moderate and well-to-do recipients
would not erode over time (thereby preserving their support for the system). 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 cost-of-
living adjustments 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 provisions (by $7,500 over three years)
as a means of raising revenue to help shore up the program’s ailing financial condition.
In 1990, as part of a 5-year plan (the Omnibus Budget Reconciliation Act of 1990) to
reduce federal budget deficits, a higher base was enacted for HI ($125,000, effective in
1991). The HI base 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 altogether. His proposal was enacted as part of the Omnibus Budget
Reconciliation Act of 1993 and took effect in 1994 (raising an estimated $29 billion in
revenues over the FY1994-98 period).
Arguments For and Against Raising or Eliminating the Base
Several proposals to raise or eliminate the base have been made in recent years. In
the 105th Congress Senator Moynihan proposed raising the base to $97,500 by 2003
($15,600 more than it was projected to be under current law) as part of a package of
changes to restore Social Security’s long-range solvency (S. 1792). He again included an
increase in the base in a solvency package he introduced in the 106th Congress (S. 21).
Similar base hikes were contained in other solvency bills introduced by Senators Gregg
and Breaux, et.al. (S.1383 and S.2774) and by Representative Nadler (H.R. 1043). In the
3 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.

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107th Congress, H.R. 2771 introduced by Representatives Kolbe and Stenholm would hold
the base at 86% of total payroll. Some general arguments for and against these ideas
follow.
Arguments For. The major complaint about the Social Security base is that it
creates a regressive tax structure. Critics point out that workers earning less than the base
have a greater proportion of earnings taxed than workers whose earnings exceed it. In
2004, someone with annual earnings of $30,000 pays $1,860 in Social Security taxes, or
6.2% of his or her earnings (ignoring the HI portion and the employer share of the tax).
However, because the tax is levied on only the first $87,900 in earnings, someone earning
$200,000 a year pays $5,450, or only 2.7% of his or her earnings. Critics point out that
only 6% of workers have earnings above the base, and, since 1991, the amount of their
earnings that escapes taxation has risen from 12% to 17%, and is projected to continue
to rise through 2012. They therefore contend that the current tax structure favors a small
group of the most 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 complain 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. They further maintain that
for most workers, Social Security and Medicare taxes (counting the employer share,
which they view as a foregone wage) are now greater than their income taxes.
Thus, critics argue that raising or eliminating the base not only would be more fair,
but also that the tax rate could be reduced without causing a loss of revenue to the system,
or, alternatively, that Social Security’s projected long-range financing problems could be
substantially alleviated. It is estimated that almost $100 billion in new Social Security
taxes 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
Social Security’s long-range deficit. This deficit currently is projected to be about 15%
of the program’s income. Proponents of increasing the base argue that, while eventually
it would cause higher benefits to be paid to some workers (because the additional “taxed”
earnings would be added to the workers’ Social Security earnings records), overall there
would be a net revenue gain to the system. The actuaries of the Social Security
Administration have estimated that if the base were eliminated, $5 in revenue would
result for every $1 in additional benefits (on average over their 75-year valuation period).
This could eliminate about 4/5ths of the long-range Social Security deficit.4
Arguments Against. Those who support keeping the base as it is argue that its
critics often view the issue as only a tax policy matter — that they see only a regressive
tax. They contend that this perceived regressivity is offset by the progressive nature of
Social Security, i.e., its benefit formula favors low-wage earners by replacing a greater
proportion of their earnings than it does for high-wage earners. They further maintain that
its critics fail to take into account the effect of the earned income tax credit (EITC). They
point out that mitigating the Social Security tax bite was part of the motivation for
4 In the 2003 trustees’ report, the average deficit was reported to be 1.92% of taxable payroll.
The SSA actuaries estimate that eliminating the base would generate revenue equal to 2.17% of
payroll on average, while benefit costs would rise by 0.47%.

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creating the EITC, which provides an income tax credit on earnings up to $35,458 in 2004
for married workers with two or more children (up to $12,490 for married workers
without children). They also point out that low-income families receive a greater share
of government transfer payments that are not subject to Social Security 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.
Supporters also point out that those who would raise the base in order to lower the
rate often ignore the long-run costs of such a change. Although such a proposal would
achieve revenue neutrality in the short run, it would increase the system’s long-range
expenditures (because more earnings would be credited to the work records of those
affected and used to calculate their benefits), which already is a matter of some concern
because of the large number of post-World War II baby boomers who will begin to enter
their retirement years in about five years. This, they argue, is different from the
elimination of the HI base, which carried no added benefit costs.
From another perspective, some — who might otherwise espouse progressive
taxation — support raising the base but not eliminating it. They believe eliminating it
would weaken the principle that Social Security gives people something for their taxes.
Having a cap makes Social Security seem less like general purpose taxation. They argue
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. This, they contend, would add fuel to complaints that the system is not
a good deal. Moreover, regardless of the money’s worth issue, some question the wisdom
of paying large benefits to well-to-do people. They argue 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. They contend that eliminating the base would cause Social Security to
supplant part of the role of private pensions, while raising public cynicism about a
publicly financed system that pays enormous benefits to people who already are well off.
Table 1. Social Security and Medicare Tax Rates and Taxable
Earnings Bases
Tax rates
Self-employed
% of workers
% of covered
( Social
Maximum taxable
with earnings
earnings
Sociala
Security & HI
earnings for Social
below Social
below Social
Year Security
HIa
combined)
Security & HI
Security base
Security base
1937
1.000


$3,000
96.9
92.0
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

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Tax rates
Self-employed
% of workers
% of covered
( Social
Maximum taxable
with earnings
earnings
Sociala
Security & HI
earnings for Social
below Social
below Social
Year Security
HIa
combined)
Security & HI
Security base
Security base
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
75.8
80.0
1967
3.900
.5
6.4
6,600
73.6
78.1
1968
3.800
.6
6.4
7,800
78.6
81.7
1969
4.200
.6
6.9
7,800
75.5
80.1
1970
4.200
.6
6.9
7,800
74.0
78.2
1971
4.600
.6
7.5
7,800
71.7
76.3
1972
4.600
.6
7.5
9,000
75.0
78.3
1973
4.850
1.0
8.0
10,800
79.7
81.8
1974
4.950
.9
7.9
13,200
84.9
85.3
1975
4.950
.9
7.9
14,100
84.9
84.4
1976
4.950
.9
7.9
15,300
85.1
84.3
1977
4.950
.9
7.9
16,500
85.2
85.0
1978
5.050
1.0
8.1
17,700
84.6
83.8
1979
5.080
1.05
8.1
22,900
90.0
87.3
1980
5.080
1.05
8.1
25,900
91.2
88.9
1981
5.350
1.3
9.3
29,700
92.4
89.2
1982
5.400
1.3
9.35
32,400
92.9
90.0
1983
5.400
1.3
9.35
35,700
93.7
90.0
1984
5.700
1.3
14.0
37,800
93.6
89.3
1985
5.700
1.35
14.1
39,600
93.5
88.9
1986
5.700
1.45
14.3
42,000
93.8
88.6
1987
5.700
1.45
14.3
43,800
93.9
87.6
1988
6.060
1.45
15.02
45,000
93.5
85.8
1989
6.060
1.45
15.02
48,000
93.8
86.8
1990
6.200
1.45
15.3
51,300
94.3
87.2
1991
6.200
1.45
15.3
53,400 (HI-125,000)
94.4
87.8
1992
6.200
1.45
15.3
55,500 (HI-130,200)
94.3
86.8
1993
6.200
1.45
15.3
57,600 (HI-135,000)
94.4
87.2
1994
6.200
1.45
15.3
60,600 (HI-no limit)
94.6
87.1
1995
6.200
1.45
15.3
61,200 (HI-no limit)
94.2
85.8
1996
6.200
1.45
15.3
62,700 (HI-no limit)
93.9
85.7
1997
6.200
1.45
15.3
65,400 (HI-no limit)
93.8 est.
85.1 est.
1998
6.200
1.45
15.3
68,400 (HI-no limit)
93.7 est.
84.5 est.
1999
6.200
1.45
15.3
72,600 (HI-no limit)
94.0 est.
84.1 est.
2000
6.200
1.45
15.3
76,200 (HI-no limit)
Not yet known
83.2 est.
2001
6.200
1.45
15.3
80,400 (HI-no limit)
Not yet known
83.0 est.
2002
6.200
1.45
15.3
84,900 (HI-no limit)
Not yet known
Not yet known
2003
6.200
1.45
15.3
87,000 (HI-no limit)
Not yet known
Not yet known
2004
6.200
1.45
15.3
87,900 (HI-no limit)
Not yet known
Not yet known
Source: Social Security Bulletin, Annual Statistical Supplement, 2002.
a Same for employer except 1984 — employee received 0.3% credit (not reflected above). Various credits
also applied to self-employed (not reflected above) for 1984-1989 period.