Function 650 - Social Security

Increase the Maximum Taxable Earnings for the Social Security Payroll Tax

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–
  Raise Taxable Share to 90 Percent
Change in Outlays 0.1 0.2 0.4 0.7 1.0 1.4 1.9 2.4 3.1 3.8 2.5 15.1
Change in Revenues 18.5 61.1 65.0 65.0 68.3 71.1 73.9 77.2 79.7 82.0 277.9 661.8
  Decrease (-) in the Deficit -18.4 -60.9 -64.6 -64.3 -67.3 -69.7 -72.0 -74.8 -76.6 -78.2 -275.4 -646.7
  Subject Earnings Greater Than $250,000 to Payroll Tax
Change in Revenues 26.6 88.9 93.6 98.0 104.0 109.5 115.1 122.5 129.4 136.5 411.1 1,024.0

Data sources: Staff of the Joint Committee on Taxation; Congressional Budget Office.
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). The outlays would be for additional payments of Social Security benefits and would be classified as off-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. In 2018, about 83 percent of earnings from employment covered by Social Security fell below the maximum taxable amount and were thus subject to the Social Security payroll tax.

This option considers two alternatives that would increase the share of earnings subject to Social Security payroll taxes. The first alternative would raise the threshold for maximum taxable earnings such that the taxable share of earnings from jobs covered by Social Security was 90 percent. (In later years, the maximum would grow at the same rate as average wages, as it would under current law.) The additional taxed earnings would be included in the benefit calculation. As a result, outlays for Social Security would increase, and that effect would grow for many decades beyond the 10-year period of the estimates as more individuals subject to the new taxable maximum claimed their benefits.

The second alternative would apply the 12.4 percent payroll tax to earnings over $250,000 in addition to earnings below the maximum taxable amount under current law. The taxable maximum would continue to grow with average wages but the $250,000 threshold would not change, so the gap between the two would shrink. The Congressional Budget Office projects that the taxable maximum would exceed $250,000 in calendar year 2039; after that, all earnings from jobs covered by Social Security would be subject to the payroll tax. Earnings under the current-law taxable maximum would still be used for calculating benefits, so scheduled benefits would not change under this alternative.