What is the Social Security taxable maximum?
The primary source of financing for Social Security comes from payroll taxes under the Federal Insurance Contribution Act (FICA). The Social Security—or Old-Age, Survivors and Disability Insurance (OASDI)—portion of FICA imposes a tax rate on labor income, which is split evenly between employers and employees. Self-employed individuals are subject to an equivalent tax under the Self-Employment Contribution Act (SECA) at a rate currently equal to the rate set under FICA. An individual’s combined FICA and SECA earnings are only subject to the Social Security tax up to a certain threshold, known as the taxable maximum. Social Security payroll taxes are therefore regressive, since those earning more than the taxable maximum pay a smaller percentage of their income than those earning less than the maximum. The taxable maximum is also the maximum amount of income in a given year that can be used to calculate an individual’s Social Security benefits.
Current Law:
For tax year 2019, the Social Security portion of both FICA and SECA impose a tax rate of 12.4 percent. The taxable maximum in 2019 is $132,900 and increases over time with average wage growth.1
Policy option:
We estimate a policy option that would raise the taxable maximum from the projected level of $140,900 in 2021 to $300,000. As under current law, this new taxable maximum would increase over time with average wage growth. There would be no corresponding increase in Social Security benefits for workers who pay more taxes during their lifetimes under the proposal. Consequently, the policy option would separate the taxable maximum from the maximum amount of income in a given year considered in an individual’s benefit calculation.
PWBM has previously analyzed an increase to the taxable maximum in conjunction with other Social Security policy changes as well as the creation of a “donut hole” tax on income above above the taxable maximum.
Budget estimate:
On a conventional basis, PWBM estimates this policy would raise about $1.2 trillion over the period 2021 to 2030, as shown in Table 1.
| Policy | 2021 | 2022 | 2023 | 2024 | 2025 | 2026 | 2027 | 2028 | 2029 | 2030 | 2021-2030 |
|---|---|---|---|---|---|---|---|---|---|---|---|
| Raise the Social Security taxable maximum to $300,000 | 82 | 108 | 112 | 115 | 120 | 124 | 130 | 136 | 140 | 144 | 1,212 |
Economic effects:
As shown in Table 2, PWBM estimates that increasing the taxable maximum to $300,000 would reduce the nation’s production output, as measured by Gross Domestic Product (GDP), by 1.7 percent in 2050.
| Year | GDP | Capital stock | Labor income | Hours worked | Consumption |
|---|---|---|---|---|---|
| 2030 | -1.1% | -1.4% | -1.1% | -0.3% | -1.9% |
| 2040 | -1.3% | -2.3% | -1.3% | -0.3% | -2.4% |
| 2050 | -1.7% | -3.4% | -1.7% | -0.3% | -2.8% |
Note: Consistent with empirical evidence, the projections above assume that the U.S. economy is 40 percent open and 60 percent closed. Specifically, 40 percent of new government debt is purchased by foreigners.
Following scoring conventions, we assume that this additional revenue is used to pay down federal debt. A reduction in federal debt “crowds in” private capital formation, thereby potentially increasing GDP. However, this policy decreases savings and investment since highly productive workers, which as a group has a high savings rate, have less to invest. Since benefits do not increase in response to an increase in the tax ceiling, the marginal link between taxes and benefits is also reduced, thereby leading to fewer hours worked. The reduced output means that the effect of deficit reduction is dominated by the reduced savings and investment.
Distributional analysis:
As Table 3 shows, on a conventional basis, the cost of this policy would fall largely on the upper-middle class and richest Americans. After-tax incomes for those in the 95th to 99th percentiles would fall by 1.3 percent, experiencing the greatest change of any income group. Workers with earnings under the current taxable maximum would not be affected by this policy.
| Income group | Average tax change | Share with a tax increase | Percent change in after tax income | Share of tax change | Share of federal taxes paid | Change in share of federal taxes paid |
|---|---|---|---|---|---|---|
| Bottom quintile | $0 | 0% | 0.0% | 0% | 0% | 0.0% |
| Second quintile | $0 | 0% | 0.0% | 0% | 1% | 0.0% |
| Middle quintile | $0 | 0% | 0.0% | 0% | 8% | -0.1% |
| Fourth quintile | $5 | 0% | 0.0% | 1% | 17% | -0.2% |
| 80-90% | $155 | 17% | -0.1% | 6% | 14% | -0.1% |
| 90-95% | $1,165 | 50% | -0.6% | 20% | 11% | 0.1% |
| 95-99% | $3,830 | 77% | -1.3% | 53% | 18% | 0.5% |
| 99-99.9% | $5,820 | 79% | -0.7% | 18% | 15% | 0.0% |
| Top 0.1% | $5,770 | 79% | -0.1% | 2% | 16% | -0.2% |