Order Code RL32896
CRS Report for Congress
Received through the CRS Web
Social Security: Raising or Eliminating
the Taxable Earnings Base
Updated January 26, 2006
Debra Whitman
Specialist in the Economics of Aging
Domestic Social Policy Division
Congressional Research Service ˜ The Library of Congress
Social Security: Raising or Eliminating the Taxable
Earnings Base
Summary
Social Security taxes are levied on earnings up to a maximum level set each
year. In 2006, this maximum — or what is referred to as the taxable earnings base
— is $94,200. 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
earnings for each worker 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 base has risen at the same rate as average wages
in the economy. However, the percent of covered earnings that are taxable have
decreased from 90% in 1982 to 85% in 2004. The percentage of covered earnings
that is taxable is projected to decline to about 83% for 2014 and later. Since 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 8.5 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 (10%) and South Dakota has the lowest share (2%).
Raising or eliminating the cap on wages that are subject to taxes would reduce
the long-range deficit in the Social Security Trust Funds. For example, raising the
maximum taxable earnings from $94,200 to $150,000 — roughly the level needed
to cover 90% of all earnings — would eliminate roughly 40% of the long-range
shortfall in Social Security. This change would generate $182 billion over the five-
year budget window of 2006-2010 and $433 billion in additional revenue between
2006-2015. 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 the
next 75 years. However, the link between contributions and benefits would be
broken.
There is no similar earnings base for the Medicare Hospital Insurance (HI)
portion of the payroll tax; all earnings are taxable for HI purposes. Elimination of
the HI base was proposed by President Clinton as a way to raise revenue and enacted
in 1993, effectively beginning in 1994.
This report will be updated as legislative activity warrants.
Contents
Background . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Origin and History of the Taxable Earnings Base . . . . . . . . . . . . . . . . . . . . . 1
The Taxable Earnings Base Today . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
The Taxable Earnings Base Over Time . . . . . . . . . . . . . . . . . . . . . . . . . 4
The Taxable Earnings Base by State . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
The Taxable Earnings Base by Employment Status and Gender . . . . . . 5
The Future of the Taxable Earnings Base . . . . . . . . . . . . . . . . . . . . . . . 5
Impact of Raising or Eliminating the Taxable Earnings Base . . . . . . . . . . . . 5
Impact on the Social Security Trust Funds . . . . . . . . . . . . . . . . . . . . . . 5
Impact on Federal Revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Impact on Workers and Employers . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Legislation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Legislation in Prior Congresses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Legislation in the 109th Congress . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Arguments for and Against Raising or Eliminating the Base . . . . . . . . . . . 10
Arguments For . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Arguments Against . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
List of Figures
Figure 1. Share of Earnings and Population Above the Taxable Earnings
Base 1980-2004 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
List of Tables
Table 1. Social Security and Medicare Tax Rates and Taxable
Earnings Bases 1937-2006 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Table 2. The Number and Percentage of Wage and Salary Workers with
Social Security Taxable Earnings Over the Taxable Earnings Base of
$84,900, by State, 2002 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Table 3. Number and Percentage of Workers Above the Taxable Earnings
Base of $87,000, by Type of Earnings and Sex, 2003 . . . . . . . . . . . . . . . . . 15
Social Security: Raising or Eliminating the
Taxable Earnings Base
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. Since that time the rate has risen to 6.2% and
the taxable maximum 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
$90,000 in 2005 to $94,200 in 2006 is based on the increase in average wages from
2003 to 2004.1
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 Hill 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.
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 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
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 know in time.
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$3,000 per year.2 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 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 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 would 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 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 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.3 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.
Then, to reduce federal budget deficits, the Omnibus Budget Reconciliation Act of
1990 (P.L. 101-518) 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 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.
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.
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The Taxable Earnings Base Today
In 2004 an estimated 157 million workers paid Federal Insurance Contributions
Act (FICA) taxes and Self-Employment Contributions Act (SECA) taxes on their
wages and net self-employment income.4,5 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 Hospital Insurance part of Medicare. The OASDI tax is
levied on earnings up to $94,200 in 2006. The HI tax is levied on all earnings.
2006 Social Security and Medicare Tax Rates and
Maximum Taxable Earnings
FICA and SECA Tax Rates:
FICA
SECA*
Old-Age and Survivors Insurance
5.3%
10.6%
+Disability Insurance
0.90%
1.8%
=Subtotal Social Security (OASDI)tax rate
6.20%
12.4%
+ Hospital Insurance tax rate
1.45%
2.9%
Total FICA and SECA rate
7.65%
15.3%
Combined Employee and Employer FICA Tax Rates:
Employee
7.65%
+Employer
7.65%
Combined FICA rate
15.3%
Maximum Taxable Earnings:
Social Security
$94,200
Hospital Insurance
no maximum
Maximum FICA/SECA Taxes:
OASDI
HI
Employee/Employer (each):
$5,840.40
No limit
Self-Employed:
$11,680.80
No limit
Percent of Aggregate Earnings Above the Base (not taxed) 2004:
Social Security
15.4%
Hospital Insurance
(all earnings are taxed)
Social Security Benefit for 2006 Retiree With Earnings at or
Above the Maximum for Entire Career :
Monthly
Annual
Retired at age 62:
$1,530
$18,360
Retired at full retirement age (65+6 months):
$2,053
$24,636
Source: SSA
*Certain adjustments and income tax deductions apply.
4 Social Security Administration, Annual Statistical Supplement, 2005.
5 Some workers are exempt from payroll taxes. For a listing of workers who are exempt
from FICA and SECA taxes see CRS Report 94-28, Social Security and Medicare Taxes and
Premiums: Fact Sheet, by Dawn Nuschler.
CRS-4
The Taxable Earnings Base Over Time. As shown in Table 1 and Figure
1, the share of covered workers below the taxable earnings base has remained
relatively stable since the 1980s at roughly 94%. However, during the same period
the share of covered payroll that is taxed has fallen from 90% of all earnings in 1982
to 85% in 2004. The large declines in the late 1990s were mainly due to the fact that
salaries for top earners grew faster than the pay of workers below the cap.6
Figure 1. Share of Earnings and Population Above the Taxable
Earnings Base 1980-2004
18%
17%
15%
16%
14%
14%
14%
12%
Share of
12% 11%
Aggregate
10%
Earnings
10%
Above the
9%
Base
8%
Share of the
7%
6%
Population
6%
Above the
6%
Base
5%
5%
4%
2%
0%
(2001-2004)
1980
1985
1990
1995
2000 estimated)
Source: Figure prepared by Congressional Research Service (CRS), based on data from the Social
Security Administration, Social Security Bulletin, Annual Supplement, 2005.
The Taxable Earnings Base by State. In 2002, slightly more than 5% of
workers with wage and salary income had earnings above the taxable base of
$84,900.7 However, focusing on the nationwide average hides the diversity between
the states. As shown in Table 2, the share of the population above the base in 2002
ranges from a high in New Jersey where 10.2% of covered workers earn above the
base to a low in South Dakota where less than 2% of workers earn this amount. The
states with the lowest share of workers over the base are: South Dakota, North
Dakota, Montana, West Virginia, and Arkansas. Those with the highest share of
6 At least some of this decline and subsequent increase in the ratio 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)
7 These figures do not include individuals with only self-employment income. Note that the
calculations in Tables 1, 2 and 3 differ slightly due to differences in data.
CRS-5
workers over the base are: New Jersey, the District of Columbia, Connecticut,
Massachusetts, California and New York.
The Taxable Earnings Base by Employment Status and Gender. In
2003, the latest year for which data is available, 8.5 million individuals had earnings
above the taxable maximum.8 As shown in Table 3, these individuals represent 6%
of all workers covered by Social Security. Roughly 80% of these individuals were
men and 93% were wage and salary workers. Only 765,000 or 9% of these
individuals received any self-employment income. In total, 8% of all male workers
and 3% of all female workers in 2003 had earnings above the maximum. Of the self-
employed, roughly 7% of men and 2% of women earned more than the taxable
earnings base.
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, the share
of payroll that is taxed is expected to decline even further. Under the intermediate
assumptions of the 2005 Trustees Report, the percentage of covered earnings that is
taxable is projected to decline to about 83% for 2014 and remain stable thereafter.
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. The full impact of the policy change would depend
on whether or not the wages above the maximum would be counted toward benefits.
The taxable earnings base serves as both a cap on contributions into the system and
a cap on benefits. As a contribution base, it establishes the maximum amount of
covered earnings for each worker that is subject to the payroll tax. As a benefit base,
it establishes the maximum amount of earnings that are used to calculate benefits.
The current benefit for an individual who, during his or her working life, earned the
maximum amount or higher for at least 35 years (the number of years on which
benefits are calculated) and retired at the full retirement age (65 and six months in
2006) is $2,053 a month or $24,636 per year. The benefit replaces about 26% of the
worker’s taxable earnings. Maintaining the current structure, where benefits are
calculated on the full contribution base, while raising or eliminating the taxable
earnings base would lead to higher monthly Social Security checks for wealthy
individuals who would pay the additional taxes.
Impact on the Social Security Trust Funds. Under the assumptions of
the 2004 Trustees Report, the actuaries at the Social Security Administration
calculate that it would take an immediate increase in combined payroll taxes of
1.89% of taxable payroll (from 12.4% to 14.29%) to achieve solvency over the next
8 Social Security Administration, Annual Statistical Supplement, 2005. See
[http://www.ssa.gov/policy/docs/statcomps/supplement/2005/4b.html#table4.b1].
CRS-6
75 years.9 Without this increase or other changes to the system, the OASDI Trust
Funds are projected to be exhausted in 2042.
An alternative to raising the payroll tax rate to improve solvency is to rase or
remove the taxable earnings base. Workers with earnings below the base would not
contribute additional taxes, but those above the base would make higher FICA and
SECA contributions. This policy option could be implemented in a variety of ways.
The base could be removed completely or the base could be set to cover a given share
of total earnings in the economy. The wage base could also be set at different levels
for employers and employees rather than at an equal level as under current law.
Further, the current base could be maintained for the calculation of benefits or high
earners’ benefits could be based on the new taxable earnings base. The impact on the
Social Security Trust Funds of three of these options is detailed below.
Option1: Cover 90% of earnings and pay higher benefits. One
proposal would be to slowly raise the taxable wage base for both employers and
employees to cover 90% of all earnings — roughly the level in 1983 when Congress
last addressed Social Security’s finances — and credit these taxes to allow
individuals to receive correspondingly higher benefits. In 2005, it was estimated that
a cap of $150,000 would roughly cover 90% of wages. If the wage base was
$150,000, contributions by employers and employees would be at most $3,459 higher
than under current law. 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. Raising the wage base to 90% would eliminate 40% of the
long-range financial shortfall — extending the Trust Funds’ exhaustion date to
2053.10 To achieve solvency for the next 75 years under this option, the payroll tax
rate would also have to be raised by 1.14% of taxable payroll (from 12.4% to
13.54%).11
9 The projections in this section were done using the assumptions of the 2004 Trustees
Report. Under the intermediate assumptions of the 2005 Trustees Report, the actuarial
deficit is 1.92% of taxable payroll for the 75-year projection period and the trust fund is
projected to be exhausted in 2041. (Social Security Administration, 2005 OASDI Trustees
Report.)
10 Reno and Lavery, Options to Balance Social Security Funds, Feb. 2005.
11 Social Security Administration, Estimated OASDI Long-Range Financial Effects of
Several Provisions Requested by the Social Security Advisory Board, Memorandum, dated
Feb. 2, 2005, [http://www.ssab.gov/financing/2004_update.pdf].
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Impact on the Social Security Trust Funds of Raising or Eliminating
the Social Security Taxable Earnings Base*
Year the
75-year Actuarial
Trust
Balance
Percent of
Funds are
(as a % of taxable
75-year
exhausted
payroll)
shortfall met
No change to current law
2042
-1.89
Option 1: Make 90% of the
2053
-1.14
40%
earnings subject to the payroll tax
and credit them for benefit
purposes (phased in 2005-2014)
Option 2: Make all earnings
2079
-0.14
93%
subject to the payroll tax and
credit them for benefit purposes
(beginning in 2005)
Option 3: Make all earnings
n.a.**
0.32
116%
subject to the payroll tax but
retain the cap for benefit
calculations (Beginning in 2005)
Sources: Social Security Administration, Memorandum, dated Feb. 2, 2005. Reno and
Lavery, Options to Balance Social Security Funds, Feb. 2005.
* All calculations use the intermediate assumptions of the 2004 Trustees Report.
**Solvent beyond 75-year estimate.
Option2: 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, 93% of the projected financial shortfall in the Social Security
program would be eliminated. 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 revenue would provide only $1 in additional benefits (on average
over their 75-year valuation period).12 Annual Social Security benefit payments
would be much higher than today’s maximum of $24,636. A worker who paid taxes
on earnings of $400,000 each year would get a benefit of about $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 about
$13,500 a month or $162,000 a year — a replacement rate of 16.2%.13,14
12 Eliminating the base would generate revenue equal to 2.21% of payroll on average, while
benefit costs would rise by 0.46%. (1.75% total).
13 Calculations are for 2005 from Reno and Lavery, Options to Balance Social Security
Funds, Feb. 2005.
14 Benefits this high would be extremely rare as very few individuals earn above the taxable
wage base for their entire career.
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Option3: 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 116%
of the projected shortfall and the program would have surplus of 0.32% of wages.
Under this scenario, the payroll tax rate could be immediately lowered by 2.6% of
taxable payroll (from 12.4% to 12.08%), and the system would remain solvent for the
next 75 years. However, the traditional link between the level of wages that are taxed
and the level of wages that count toward benefits would be broken.
I m p a c t o n
Revenue Impact of Raising the Social Security Taxable
Federal Revenue.
Earnings Base
Raising the taxable
earnings base would lead
Taxable
Total change in
to an increase in total
wage base
revenues
(dollars)
(billions of
federal revenues. The
dollars)
Joint Committee on
Taxation has estimated
Year
2005
2006-
2006-
that rasing the wage base
2010
2015
to 90% of earnings,
Tax 92% of
$190,000
+246.6
+581.1
roughly $150,000 in
earnings
2005, would generate
Tax 91% of
$170,000
+216.0
+515.6
$182 billion in additional
earnings
revenue over the five-
year budget window of
Tax 90% of
$150,000
+182.3
+433.4
2006-2010.15,16 Over 10
earnings
years the policy would
generate more than $430
Source: Joint Committee on Taxation, 2005.
billion. Rasing the
payroll tax to cover an
additional 1%-2% of income (above the 90% level) would generate $30-$64 billion
more over five years and $65-$148 billion more over 10 years.
Impact on Workers and Employers. The reaction of high-earning workers
and their employers to raising or removing the taxable earnings base is unknown.
There would be a reduction in the incentive to work for individuals who earn more
than the cap (currently $94,200) as their after-tax earnings will fall.17 However,
15 Congressional Budget Office, Budget Options, Revenue Option 39: Increase the Upper
Limit for Earnings Subject to the Social Security Payroll Tax, Feb. 2005
[http://www.cbo.gov].
16 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 while the JCT assumes it will be a one-time increase with
adjustments only for inflation thereafter. JTC estimates also account for the effects on all
sources of revenue including changes income taxes and Medicare taxes.
17 The response by high earners may depend on whether the wage base is raised slightly or
(continued...)
CRS-9
whether these individuals will significantly reduce the amount they work is a matter
of debate. Each worker will face a decision between the reduced earnings and the
additional leisure time, based on the worker’s individual preferences. Increasing the
wage base may also have an impact on wages reported by employers. Workers who
have earnings above the base would have an incentive to change the form of their
compensation to avoid paying the payroll taxes.18 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.
Legislation
Legislation in Prior Congresses. A number of proposals to raise or
eliminate the base have been made in recent sessions of Congress. 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 in the 106th
introduced by Senators Gregg and Breaux, et al. (S. 1383 and S. 2774) and by
Representative Nadler (H.R. 1043). In the 107th Congress, H.R. 2771, introduced
by Representatives Kolbe and Stenholm, would have held the base at 86% of total
payroll. In the 108th Congress two bills would have raised the wage base. A bill by
Kolbe and Stenholm (H.R. 3821) would have gradually raised the base to $133,200,
in 2008 and then held the base equal to 87% of total payroll thereafter. H.R. 5179,
sponsored by Representative Obey, would have brought the percent of covered
earnings subject to the Social Security payroll tax up to 90% by increasing the rate
of growth in the Social Security taxable wage base by 2 percentage points above
average wage growth for years 2006 through 2036.
Legislation in the 109th Congress. Two bills in the 109th Congress would
change the taxable wage base. H.R. 440, introduced by Representative Kolbe and
Representative Boyd, would gradually raise the base to $142,500 in 2010 and then
index it to 87% of total payroll thereafter. A bill by Representative Wexler (H.R.
2472) would require workers and employers to each contribute 3% of earnings above
the taxable wage base. Self-employed individuals would contribute 6% of earnings
above the taxable wage base. Earnings above the taxable wage base taxed at the 3%
rate would not be credited for benefit computation purposes.
17 (...continued)
completely eliminated.
18 See Martin Sullivan, “Budget Magic and the Social Security Tax Cap,” Tax Notes. Mar.
14, 2005.
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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 complaint 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 2006,
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 $94,200 in earnings,
someone earning $200,000 a year pays $5,840, or 2.9% of his or her earnings.
Supporters of changing the wage base point out that only 5% of workers have
earnings above the base. However due to rising income inequality, since 1991, the
amount of their earnings that escape taxation has risen from 12% to 15%, 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 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.19 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 also argue that subjecting a larger percentage of earnings to the
payroll tax would also adjust for the higher life expectancies of high earners.20 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 lifetime making the system less progressive.21 They claim
that rasing 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 the payroll 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.
19 See CRS Report RL32693, Distribution of the Tax Burden Across Individuals: An
Overview, by Jane G. Gravelle and Maxim Shvedov.
20 See Peter A. Diamond and Peter R. Orzag, Saving Social Security: A Balanced Approach,
Brookings Institution, 2004.
21 The Social Security is thought to be progressive in that the benefit formula favors low-
wage earners by replacing a greater proportion of their earnings than it does for high-wage
earners.
CRS-11
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 93% of Social Security’s long-range deficit.
Arguments Against. Those who support keeping the base as it is point out
that while the structure of the payroll tax may be regressive, it is offset by the
progressive calculation of benefits.
They 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 $38,348 in
2006 for married workers with two or more children (up to $14,120 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.
Critics also argue that raising the cap will serve as a disincentive to work and
could serve as a drain on the economy.22 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. 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. 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 raise
public cynicism about a publicly financed system that pays enormous benefits to
people who already are well off.
22 See D. Mark Wilson, Removing the Social Security’s Tax Cap on Wages Would Do More
Harm Than Good, The Heritage Foundation, Oct. 18, 2001.
CRS-12
Table 1. Social Security and Medicare Tax Rates and Taxable
Earnings Bases 1937-2006
Tax Rates
Percent of
Self-
workers
Percent of
employed
with
covered
( Social
Maximum taxable
earnings
earnings
Security
earnings for
below Social
below Social
Social
and HI
Social Security
Security
Security
Year Securitya
HIa
combined)
and HI
base
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
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
CRS-13
Tax Rates
Percent of
Self-
workers
Percent of
employed
with
covered
( Social
Maximum taxable
earnings
earnings
Security
earnings for
below Social
below Social
Social
and HI
Social Security
Security
Security
Year Securitya
HIa
combined)
and HI
base
base
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
85.1
1998
6.200
1.45
15.3
68,400 (HI-no limit)
93.7
84.5
1999
6.200
1.45
15.3
72,600 (HI-no limit)
93.9
83.9
2000
6.200
1.45
15.3
76,200 (HI-no limit)
93.8
83.2
2001
6.200
1.45
15.3
80,400 (HI-no limit)
94.0**
84.7**
2002
6.200
1.45
15.3
84,900 (HI-no limit)
94.6**
86.1**
2003
6.200
1.45
15.3
87,000 (HI-no limit)
94.5**
86.1**
2004
6.200
1.45
15.3
87,900 (HI-no limit)
Not yet known
84.6**
2005
6.200
1.45
15.3
90,000 (HI-no limit)
Not yet known
Not yet known
2006
6.200
1.45
15.3
90,000 (HI-no limit)
Not yet known
Not yet known
Source: Social Security Bulletin, Annual Statistical Supplement, 2005 at
[http://www.ssa.gov/policy/docs/statcomps/supplement/2005].
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.
**Estimates
CRS-14
Table 2. The Number and Percentage of Wage and Salary
Workers with Social Security Taxable Earnings Over the
Taxable Earnings Base of $84,900, by State, 2002
Number and share of wage and salary
Total Number of wage
workers with Social Security taxable
State
and salary workers
earnings above the taxable earnings base
with Social Security
Number
Percent
taxable earningsa
of workers
of workers
U.S. Total
144,897,000
7,653,277
5.3%
Alabama
2,130,628
65,223
3.1%
Alaska
346,020
15,719
4.5%
Arizona
2,531,563
115,340
4.6%
Arkansas
1,298,648
29,294
2.3%
California
15,195,908
1,163,710
7.7%
Colorado
2,230,556
136,979
6.1%
Connecticut
1,808,594
165,559
9.2%
DC
339,182
33,581
9.9%
Delaware
465,239
22,149
4.8%
Florida
8,013,995
330,301
4.1%
Georgia
4,211,139
214,961
5.1%
Hawaii
635,391
20,516
3.2%
Idaho
658,970
16,638
2.5%
Illinois
6,167,226
386,032
6.3%
Indiana
3,316,386
118,198
3.6%
Iowa
1,583,528
39,808
2.5%
Kansas
1,470,229
54,302
3.7%
Kentucky
2,010,899
55,322
2.8%
Louisiana
1,976,501
59,303
3.0%
Maine
661,419
18,781
2.8%
Maryland
2,920,249
205,571
7.0%
Massachusetts
3,190,226
269,978
8.5%
Michigan
5,259,305
291,208
5.5%
Minnesota
2,842,981
149,126
5.2%
Missouri
2,897,079
97,886
3.4%
Montana
466,362
8,676
1.9%
Nebraska
957,935
27,253
2.8%
Nevada
1,046,737
36,643
3.5%
New Hampshire
716,538
50,117
7.0%
New Jersey
4,489,895
460,136
10.2%
New Mexico
854,231
25,416
3.0%
New York
9,252,013
700,921
7.6%
North Carolina
4,213,589
160,762
3.8%
North Dakota
339,590
5,206
1.5%
Ohio
5,629,108
234,865
4.2%
Oklahoma
1,698,358
42,870
2.5%
Oregon
1,763,683
73,593
4.2%
Pennsylvania
6,366,571
303,457
4.8%
Puerto Rico
1,099,202
12,146
1.1%
Rhode Island
578,334
27,151
4.7%
South Carolina
2,041,520
64,509
3.2%
South Dakota
416,041
6,328
1.5%
Tennessee
2,921,371
101,663
3.5%
Texas
9,794,622
528,625
5.4%
Utah
1,166,977
35,725
3.1%
Vermont
351,736
10,615
3.0%
CRS-15
Number and share of wage and salary
Total Number of wage
workers with Social Security taxable
and salary workers
earnings above the taxable earnings base
with Social Security
Number
Percent
State
taxable earningsa
of workers
of workers
Virgin Islands
42,666
1,225
2.9%
Virginia
3,905,437
254,871
6.5%
Washington
3,100,506
169,846
5.5%
West Virginia
820,854
16,025
2.0%
Wisconsin
3,061,719
104,419
3.4%
Wyoming
277,327
6,839
2.5%
Other
1,998,242
82,371
4.1%
Source: SSA, custom tabulation based on the 1% sample file, estimated for 2002.
a. Does not include workers with only self-employment income.
Table 3. Number and Percentage of Workers Above the Taxable
Earnings Base of $87,000, by Type of Earnings and Sex, 2003
Percent of
Percent
group above
Numbera
of group
the taxable
(in thousands)
in total
maximum
All workers
8,491
100%
6%
Men
6,656
78%
8%
Women
1,832
22%
3%
All wage and salary workers
7,923
93%
5%
Men
6,220
73%
8%
Women
1,703
20%
2%
All self-employed
765
9%
5%
Men
624
7%
7%
Women
140
2%
2%
Source: Social Security Bulletin, Annual Statistical Supplement, 2005 at
[http://www.ssa.gov/policy/docs/statcomps/supplement/2005]. (CRS calculations based on 2003
estimates from tables, 4.B1,4.B4, 4.B7, and 4B.9).
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.