Revenues

Function 650 - Social Security

Increase the Maximum Taxable Earnings That Are Subject to Social Security Payroll Taxes

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		2025	2026	2027	2028	2029	2030	2031	2032	2033	2034	2025– 2029	2025– 2034
Decrease (-) in the deficit
	Raise the taxable share to 90 percent of earnings^a	-22.5	-72.3	-73.9	-75.3	-77.0	-78.9	-80.2	-81.4	-82.5	-83.6	-321.0	-727.6
	Subject earnings greater than $250,000 to payroll taxes	-35.7	-122.0	-129.4	-136.7	-143.7	-152.5	-161.7	-171.5	-181.5	-192.0	-567.5	-1,426.8

Data sources: Staff of the Joint Committee on Taxation; Congressional Budget Office.

This option would take effect in January 2025.

An offset to reflect reduced income and payroll taxes has been applied to the estimates in this table.

This option would increase receipts from Social Security payroll taxes (which would be off-budget). That increase would be offset in part by a reduction in individual income tax revenues (which would be on-budget).

a. Estimates include increased outlays for additional payments of Social Security benefits, which 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 people who are self-employed. Only earnings up to a maximum, which is $168,600 in calendar year 2024, are subject to the taxes, and only earnings below the maximum are used to determine benefits. The Social Security tax rate is 12.4 percent of earnings. 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. In 2022, about 82 percent of earnings from employment fell below the maximum taxable amount and were thus subject to the Social Security payroll tax.

This option consists of two alternatives that would increase the share of earnings subject to payroll taxes. The first alternative would increase the taxable share of earnings from jobs covered by Social Security to 90 percent in calendar year 2025. Staff of the Joint Committee on Taxation estimate that doing so would raise the maximum taxable amount to $305,100 in 2024. (In later years, the maximum would grow at the same rate as average wages, as it would under current law.) Because Social Security benefits are tied to the amount of earnings on which taxes are paid, some of the increase in revenues under this alternative would be offset by additional benefits paid to people with earnings above the maximum taxable amount under current law.

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. (For example, in 2025, all earnings below $176,100—the taxable maximum for that year—would be taxed, as would earnings above $250,000. Earnings between $176,100 and $250,000 would not be taxed.) 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 2036; after that, all earnings from jobs covered by Social Security would be subject to payroll taxes. The current-law taxable maximum would still be used for calculating benefits, so scheduled benefits would not change under this alternative.

Information about the long-term and distributional effects of this option appear in the following tables.

Table A-15. Long-Term Effects on Social Security's Finances of the First Alternative
Percent
		Under current law	Change from current law
Spending, as a percentage of GDP
	Calendar year 2054	5.9	0.1
	Calendar year 2098	6.7	0.2
Revenues, as a percentage of GDP
	Calendar year 2054	4.4	0.4
	Calendar year 2098	4.6	0.4
The 75-year actuarial balance for the combined OASDI trust funds^a
	As a percentage of GDP	-1.5	0.2
	As a percentage of taxable payroll	-4.3	0.9
The exhaustion year for the balance of the combined OASDI trust funds (fiscal year)		2034	3^b

GDP = gross domestic product; OASDI = Old-Age, Survivors, and Disability Insurance.

Under this alternative, the share of earnings subject to Social Security payroll taxes would be increased to 90 percent.

The estimates displayed in this table assume that benefits will be paid as scheduled under the Social Security Act, regardless of the balances in the trust funds.

a. The actuarial balance is the sum of the present value of projected income and the current trust fund balance, minus the sum of the present value of projected outlays and a year's worth of benefits at the end of the period. For Social Security, that balance is traditionally presented as a percentage of the present value of GDP or of taxable payroll over 75 years. (A present-value estimate translates a flow of current and future income or payments into an equivalent lump-sum value today.)

b. Under this alternative, the balance of the combined trust funds would be exhausted in calendar year 2037, three years later than the projected exhaustion date under current law.

Table A-16. Distributional Effects of the First Alternative
	Under current law			Change from current law^a
Lifetime household earnings quintile^b	Birth year 1960–1969	Birth year 1970–1979	Birth year 1980–1989	Birth year 1960–1969	Birth year 1970–1979	Birth year 1980–1989
	Average annual benefits for retired workers if they claimed benefits at age 65^c
	(thousands of 2024 dollars)			(percent)
Lowest	12	13	14	*	*	*
Middle	23	24	26	*	*	*
Highest	32	35	39	**	4	7
	Average lifetime benefits relative to average lifetime earnings for beneficiaries (percent)^d
Lowest	31	32	31	*	*	*
Middle	17	18	18	*	*	*
Highest	8	7	7	2	6	8
	Average lifetime payroll taxes relative to average lifetime earnings for beneficiaries (percent)^e
Lowest	12	12	12	**	**	**
Middle	12	12	12	**	**	**
Highest	8	8	8	5	12	18
	Ratio of average Social Security benefits to average payroll taxes over beneficiaries' lifetime
Lowest	2.6	2.7	2.5	*	*	*
Middle	1.4	1.5	1.5	*	*	*
Highest	1.0	1.0	0.9	-2	-6	-8

* = between -1 percent and zero; ** = between zero and 1 percent.

Under this alternative, the share of earnings subject to Social Security payroll taxes would be increased to 90 percent.

The estimates displayed in this table assume that benefits will be paid as scheduled under the Social Security Act, regardless of the balances in the trust funds.

a. Effects are measured as a percentage change from the current-law value. For example, under current law, the average lifetime benefits for high earners born in the 1980s will be 7 percent of lifetime earnings. The 1 percentage-point increase in that ratio—from 7 percent to 8 percent—is expressed as an 8 percent increase in this table.

b. The lowest, middle, and highest fifths of people within a 10-year birth cohort ranked by lifetime household earnings. For someone who is single in all years, lifetime household earnings equal the present value of inflation-adjusted earnings over that person's lifetime. In any year in which a person is married, lifetime household earnings equal the average of the couple's earnings, adjusted for economies of scale in household consumption.

c. CBO projected the benefit amounts that retired workers would receive in their first year of receiving such benefits if they began claiming them at age 65. To remove the effects of inflation on those benefits, CBO used the price index for all goods and services that make up gross domestic product. The agency computed those benefits for all people who are eligible to claim retirement benefits at age 62 and who have not yet claimed any other Social Security benefits. All amounts are net of income taxes paid on benefits.

d. Lifetime benefits include the present value of all Social Security benefits except those received by young widows, young spouses, and children, which are excluded from this measure because of insufficient data for years before 1984. To calculate present value, CBO adjusted the amounts to remove the effects of inflation and discounted the amounts to age 65. (A present-value estimate translates a flow of current and future income or payments into an equivalent lump-sum value today.)

e. Lifetime payroll taxes consist of the present value of the employer's and employee's shares of Social Security payroll taxes. To calculate present value, CBO adjusted the amounts to remove the effects of inflation and discounted the amounts to age 65.

Table A-17. Long-Term Effects on Social Security's Finances of the Second Alternative
Percent
		Under current law	Change from current law
Revenues, as a percentage of GDP
	Calendar year 2054	4.4	0.9
	Calendar year 2098	4.6	0.9
The 75-year actuarial balance for the combined OASDI trust funds^a
	As a percentage of GDP	-1.5	0.9
	As a percentage of taxable payroll	-4.3	3.0
The exhaustion year for the balance of the combined OASDI trust funds (fiscal year)		2034	17^b

GDP = gross domestic product; OASDI = Old-Age, Survivors, and Disability Insurance.

Under this alternative, earnings greater than $250,000 would be subject to Social Security payroll taxes.

The estimates displayed in this table assume that benefits will be paid as scheduled under the Social Security Act, regardless of the balances in the trust funds.

b. Under this alternative, the balance of the combined trust funds would be exhausted in calendar year 2051, 17 years later than the projected exhaustion date under current law.

Table A-18. Distributional Effects of the Second Alternative
	Under current law			Change from current law^a
Lifetime household earnings quintile^b	Birth year 1960–1969	Birth year 1970–1979	Birth year 1980–1989	Birth year 1960–1969	Birth year 1970–1979	Birth year 1980–1989
	Average annual benefits for retired workers if they claimed benefits at age 65^c
	(thousands of 2024 dollars)			(percent)
Lowest	12	13	14	*	*	*
Middle	23	24	26	*	*	*
Highest	32	35	39	*	*	*
	Average lifetime benefits relative to average lifetime earnings for beneficiaries (percent)^d
Lowest	31	32	31	*	*	*
Middle	17	18	18	*	*	*
Highest	8	7	7	*	*	*
	Average lifetime payroll taxes relative to average lifetime earnings for beneficiaries (percent)^e
Lowest	12	12	12	**	**	**
Middle	12	12	12	**	**	**
Highest	8	8	8	17	39	49
	Ratio of average Social Security benefits to average payroll taxes over beneficiaries' lifetime
Lowest	2.6	2.7	2.5	*	*	*
Middle	1.4	1.5	1.5	*	*	*
Highest	1.0	1.0	0.9	-15	-28	-33

* = between -1 percent and zero; ** = between zero and 1 percent.

Under this alternative, earnings greater than $250,000 would be subject to Social Security payroll taxes.

The estimates displayed in this table assume that benefits will be paid as scheduled under the Social Security Act, regardless of the balances in the trust funds.

a. Effects are measured as a percentage change from the current-law value. For example, under current law, the average lifetime payroll taxes for high earners born in the 1960s will be 8 percent of lifetime earnings. The 1 percentage-point increase in that ratio—from 8 percent to 9 percent—is expressed as a 17 percent increase in this table.

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Revenues

Function 650 - Social Security

Increase the Maximum Taxable Earnings That Are Subject to Social Security Payroll Taxes

Extended Discussion in Previous Volume