Social Security Taxable Earnings Base: An Overview

Social Security Taxable Earnings Base: An Overview

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March 27, 2023
Social Security Taxable Earnings Base: An Overview
Introduction
Since 1982, the Social Security taxable earnings base has
Social Security payroll taxes are levied on covered earnings
risen at the same rate as average wages in the economy. By
up to a maximum level set each year. This maximum is
law, the base is raised whenever an automatic benefit
known as the contribution and benefit base and commonly
increase—a cost-of-living adjustment (COLA)—is payable
referred to as the taxable earnings base or the taxable
to Social Security beneficiaries, assuming wages have risen.
maximum.
(For example, there was no increase in the base from 2015
to 2016 because there was no COLA increase for 2016.)
In 2023, an estimated 183 million workers will pay into
Social Security via Federal Insurance Contributions Act
The taxable earnings base serves as a cap on both
(FICA) taxes or Self-Employment Contributions Act
contributions and benefits. As a contribution base, it
(SECA) taxes, or both, on their covered wages and self-
establishes the maximum amount of a worker’s earnings
employment income. Both employers and employees
that is subject to the OASDI payroll tax. In 2023, the
contribute payroll taxes at the FICA rate, and SECA taxes
maximum amount a wage or salary worker directly
are paid by the self-employed. Both payroll taxes have three
contributes to Social Security is $9,932.40 (the worker’s
components: Old Age and Survivors Insurance (OASI),
employer contributes an equal amount), whereas a self-
Disability Insurance (DI), and the Hospital Insurance (HI)
employed individual contributes a maximum of $19,864.80.
part of Medicare (see Table 1). The OASDI (combined
As a benefit base, it establishes the maximum amount of
OASI and DI) payroll tax is levied on covered earnings up
earnings used to calculate benefits. If a worker earned at or
to $160,200 in 2023. The HI payroll tax is levied on all
above the earnings base for his or her entire career and
covered earnings. (For more information on Medicare
retired in 2023 at the full retirement age, his or her annual
finance, see CRS Report R43122, Medicare Financial
benefit would be $43,524 ($3,627 per month). However,
Status: In Brief.)
very few Americans receive the maximum benefit, as it is
rare to have had such consistently high earnings over a
Table 1. 2023 Social Security and Medicare Tax Rates
lifetime.
Tax Rates
FICA
SECAa
Workers with Earnings Above the
Taxable Earnings Base
Old-Age and Survivors Insurance
5.30%
10.60%
According to the Social Security Administration, a small
+ Disability Insurance
0.90%
1.80%
share of workers earn above the taxable earnings base each
year. In 2020, among 174.5 million covered workers, about
= Subtotal Social Security
6.20%
12.40%
6% of workers (or 10.8 million) earned more than the
(OASDI) tax rate
taxable earnings base. Most of the individuals earning
+ Hospital Insurance tax ratea
1.45%
2.90%
above the base were men (7.6 million individuals, or nearly
71% of covered workers with earnings above the base).
Total FICA and SECA Rates
7.65%
15.30%
Approximately 9% of all male workers and 4% of all
+ Employer contribution
7.65%

female workers had earnings above the maximum. The vast
majority of individuals with earnings above the base were
Combined Employee and
15.30%
wage and salary workers (roughly 96% of covered workers
Employer FICA Tax Rates
with earnings above the base). Approximately 6% of
Source: Social Security Administration, “Social Security and
individuals who earned above the base were self-employed.
Medicare Tax Rates,” and “Social Security Tax Rates.”
A relatively small group of workers who earned above the
base (190,000 individuals, or 2% of covered workers with
Notes: FICA = Federal Insurance Contributions Act; SECA = Self
earnings above the base) have earnings in both wage and
Employed Contributions Act; OASDI = Old Age, Survivors and
salary employment and self-employment.
Disability Insurance; and HI = Hospital Insurance (Medicare Part A).
History of the Taxable Earnings Base
a. Certain adjustments and income tax deductions apply.
Under the legislation enacted in 1935, the taxable earnings
base was set at $3,000 per year per employer. Prior to 1974,
b. Beginning in 2013, individuals with earned income of more than
increases to the taxable earnings bases were specifically
$200,000 ($250,000 for married couples filing jointly) pay an
legislated on an ad hoc basis. In 1972, P.L. 92-336
additional 0.9% in Medicare taxes, which is not reflected in the
established procedures that increased the taxable earnings
tax rates shown in the table.
base automatically as a means of financing COLAs for
Social Security beneficiaries, though the adjustment to the
taxable earnings base was tied to average wage growth.
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Social Security Taxable Earnings Base: An Overview
The Social Security Amendments of 1977 (P.L. 95-216)
Proposals to Raise or Eliminate the
gradually increased the base beyond what would have
Taxable Earnings Base
resulted from the automatic-adjustment procedures from
Proposals that would change the taxable earnings base
1978 to 1981 such that in 1981, the taxable earnings base
usually raise or eliminate the contribution base (i.e.,
was $7,500 higher than the “old-law” base. This was done
earnings subject to the payroll tax). Those proposals also
as a means of raising revenue to help shore up the
include provisions for keeping or changing the benefit base
program’s ailing financial condition and was intended to
(i.e., earnings used to calculate the benefit amounts).
achieve a base under which 90% of all covered payroll
Changes to the contribution base generally fall into one of
would be subject to the OASDI payroll tax (to match the
the following categories:
original 1935 act). Increases to the taxable earnings base
after 1981 returned to automatic-adjustment procedures.
 eliminating the contribution base (i.e., all earnings are
subject to the OASDI payroll tax);
The Taxable Earnings Base over Time

Since the 1980s, the share of covered workers above the
raising the contribution base to consistently tax 90% of
taxable earnings base has remained relatively stable at
aggregate covered earnings; or
roughly 6%, with the other 94% of covered workers below
 applying the current OASDI payroll tax rate on earnings
the taxable earnings base (see Figure 1). When looking at
above a certain threshold (e.g., $250,000) and taxing all
covered earnings instead of workers, the portion of Social
earnings once the current-law taxable maximum exceeds
Security covered earnings that is subject to the payroll tax
that threshold.
has fallen from 90% of aggregate earnings in 1982 to 81%
in 2021. The decline in this percentage was mainly due to
Along with changing the contribution base, proposals also
salaries for top earners growing faster than the pay of
specify the benefit base and benefit formula that would
workers below the cap, which means top earners had wage
determine the benefit amount. Those proposals generally
growth that was higher than average. Because increases in
fall into one of the following categories:
the taxable maximum are based on average wage growth,
 keeping the cap on benefits (i.e., no benefit credit for
salaries for top earners increased faster than the taxable
earnings above the current-law taxable maximum);
maximum. This increasing gap between top earner salaries
and the taxable maximum has led to more earnings that are
 maintaining the current benefit structure where the
not subject to the OASDI payroll tax (because these
benefit base equals the contribution base (i.e., benefits
earnings are above the taxable maximum). Thus, the
are calculated based on the full contribution base) and
percentage of aggregate covered earnings that is below the
using the current benefit formula for earnings above the
taxable maximum has declined.
current-law taxable maximum; or
 maintaining the current benefit structure where the
Figure 1. Percentage of Earnings and Workers Below
benefit base equals the contribution base but providing a
the Taxable Earnings Base, 1950-2020
secondary benefit formula for earnings above the
Shaded Bars Indicate Recessions
current-law taxable maximum (usually a smaller benefit
amount than that based on the current benefit formula).
Raising or removing the taxable earnings base could reduce
Social Security’s long-term deficit (i.e., improve the long-
term solvency of the program). The full impact of the
policy change would depend on whether the earnings above
the current-law maximum would also be counted toward
benefits. Raising or eliminating the taxable earnings base
while maintaining the current benefit structure, where
benefits are calculated based on the full contribution base,
would lead to higher monthly Social Security benefits 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 the OASDI payroll tax
were eliminated and the cap on benefits were retained, the
traditional link between contributions and benefits would be
broken.
Source: Figure prepared by the CRS based on data from Social
Security Administration, Annual Statistical Supplement, 2022, Table
Additional Information
4.B1; and U.S. business recessions as defined by the National Bureau
 CRS Report RL32896, Social Security: Raising or
of Economic Research.
Eliminating the Taxable Earnings Base
Zhe Li, Analyst in Social Policy
IF12360
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Social Security Taxable Earnings Base: An Overview

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