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The Social Security Tax Rate and Taxable Maximum

This explainer was updated in July 2024.

To fund Social Security, employers and employees each pay a payroll tax of 6.2% (for a combined 12.4%) of an employee’s annual earnings up to a certain level, known as the taxable maximum. (Self-employed workers must pay the full 12.4% tax.) The Social Security Administration adjusts this limit annually to keep pace with the average wage index. In 2024, earnings up to $168,600 are subject to the Social Security tax. The earnings used to calculate benefits in retirement are capped at the same level.

In 1977, Congress raised the taxable maximum to a level that covered 90% of total national earnings. The proportion of workers earning more than the taxable maximum has remained around 6% since the 1980s; however, because income for those at the top of the earnings distribution has grown faster than average wages, the percentage of total national earnings above the taxable maximum has increased. In 2022, only 82% of total payroll was subject to Social Security taxes.

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Increasing the Tax Rate and Raising the Taxable Maximum

As part of a comprehensive package of Social Security reforms included in its 2016 report, the Bipartisan Policy Center’s Commission on Retirement Security and Personal Savings proposed increasing the payroll tax rate by 0.1 percentage points a year for 10 years, up to 13.4%. This increase would be equally divided between employers and employees.

The Social Security Administration’s Office of the Chief Actuary estimates that enacting this payroll tax increase alone would close 25% of the program’s long-term shortfall.

BPC’s commission also proposed increasing the taxable maximum in equal amounts over four years to a level that would cover 86% of total national earnings. If implemented in 2024, this would increase the taxable maximum to $279,900 in 2028 (instead of $195,900 as currently projected). After that, the proposal would index annual increases to average wage growth plus 0.5 percentage points to help prevent the tax base from eroding over time.

Although this reform would affect only the roughly 6% of workers with earnings above the current taxable maximum, it would represent a sizable tax increase on the small population with earnings moderately higher than the current cap, as the total payroll tax rate on these earnings would increase from zero to 12.4%.

SSA’s Office of the Chief Actuary estimates that enacting this taxable maximum increase alone would close 15% of the program’s long-term shortfall.

Complementary Reform Options

Since earnings up to the taxable maximum are also used to calculate retirees’ Social Security benefits, raising it would lead to increased outlays as well as revenue, with those additional benefit payments going to higher earners. Thus, BPC’s commission also proposed reducing the benefit formula’s top replacement rate—the percentage of a person’s average monthly earnings above $6,721, indexed to 2023 dollars, that benefits replace—from 15% to 5%.

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