Increase the Payroll Tax Rate for Social Security

CBO periodically issues a compendium of policy options (called Options for Reducing the Deficit) covering a broad range of issues, as well as separate reports that include options for changing federal tax and spending policies in particular areas. This option appears in one of those publications. The options are derived from many sources and reflect a range of possibilities. For each option, CBO presents an estimate of its effects on the budget but makes no recommendations. Inclusion or exclusion of any particular option does not imply an endorsement or rejection by CBO.

Billions of Dollars 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2021–
Change in Revenues  
  Increase rate by 1 percentage point 44.9 63.5 66.2 68.9 71.8 73.9 76.2 79.2 82.2 85.1 315.3 711.9
  Increase rate by 2 percentage points 88.8 125.5 130.8 136.2 141.8 146.0 150.4 156.4 162.1 167.9 623.1 1,406.0

Data source: Staff of the Joint Committee on Taxation.
This option would take effect in January 2021.
An offset to reflect reduced income and payroll taxes has been applied to the estimates in this table.
The change in revenues would consist of an increase in receipts from Social Security payroll taxes (which would be off-budget), offset in part by a reduction in individual income tax revenues (which would be on-budget).

Social Security—which consists of Old-Age and Survivors Insurance and Disability Insurance—is financed primarily by payroll taxes on employers, employees, and the self-employed. Earnings up to a maximum ($137,700 in calendar year 2020) are taxed at a rate of 12.4 percent. Employees have 6.2 percent of earnings deducted from their paychecks, and the remaining 6.2 percent is paid by their employers. Self-employed individuals generally pay 12.4 percent of their net self-employment income.

This option consists of two alternative increases to the Social Security payroll tax rate. The first alternative would increase the rate by 1 percentage point; the second alternative would increase it by 2 percentage points. Those rate increases would be evenly split between employers and employees. The rate paid by self-employed people would rise by the full amount of the increase. This option would not change Social Security benefits in any way.