The Social Security Taxable Maximum

To fund Social Security, employers and employees each owe a payroll tax of 6.2% of an employee’s earnings (for a combined 12.4%) 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 2023, earnings up to $160,200 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.

Raising the Taxable Maximum

The Bipartisan Policy Center’s Commission on Retirement Security and Personal Savings proposed increasing the taxable maximum to $195,000 in 2020, which would have covered approximately 86% of total national earnings. 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.

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 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%. In part due to this adjustment, the Social Security Administration’s Office of the Chief Actuary estimated that enacting BPC’s proposal would reduce Social Security’s long-range shortfall by approximately 16%. A more aggressive proposal that would increase the taxable maximum to cover 90% of total national earnings (and would also reduce the top replacement rate to 5%), phased in over 10 years, would close 20% of the shortfall according to modeling from the Urban Institute.

Although this proposal would only affect 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%.