What Eliminating the Social Security Tax Cap Would Imply for High Earners
Social Security wants extra money, and a few Congressional lawmakers need excessive earners to assist present it.
Sens. Elizabeth Warren, D-Mass., and Bernie Moreno, R-Ohio, are calling for the elimination of the Social Security payroll tax cap. The proposal would require individuals with greater wages to pay Social Security taxes on extra of what they earn.
But altering the Social Security tax cap can be extra sophisticated than merely asking excessive earners to pay extra taxes. Key questions Congress must handle embrace how you can change the cap and whether or not further taxes would enhance Social Security advantages for prime earners.
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And…the clock is ticking. Without main adjustments, the Social Security retirement and survivor belief fund is projected to run in need of cash as quickly as 2032, in response to the newest Social Security Trustees’ report. That may lead to an across-the-board 22% discount in advantages. Here’s extra to know.
How the Social Security tax restrict works
If you obtain a daily paycheck, you’re probably aware of the 6.2% Social Security tax that helps fund retirement and incapacity advantages for thousands and thousands within the U.S., since it may well shrink your take-home pay. (Self-employed employees additionally pay Social Security tax on their earnings.)
But you won’t know that, relying in your earnings, the Social Security payroll tax does not essentially apply to all your wages. This is named the Social Security tax cap or tax restrict.
For 2026, Social Security taxes apply to the primary $184,500 you earn.
- Employees pay 6.2% on these wages, whereas employers pay one other 6.2%.
- Once your wages attain $184,500, you cease paying the Social Security portion of the payroll tax for the remainder of the yr.
So a employee incomes $200,000 and a employee incomes $1 million each pay Social Security taxes on $184,500 of wages. The employee incomes $1 million does not pay the 6.2% Social Security tax on the remaining $815,500.
That tax restrict additionally impacts future advantages. The Social Security Administration makes use of your earnings historical past to calculate your Social Security profit, however that calculation does not embrace earnings above the tax restrict.
Essentially, the present Social Security payroll tax system caps each how a lot excessive earners pay into Social Security and the way a lot these earnings can enhance their future advantages.
The query now’s: What would occur if Congress lifted that ceiling?
Proposal to get rid of the Social Security tax cap
Warren and Moreno need to get rid of the present tax restrict, which might topic wages above $184,500 to the 6.2% worker Social Security tax if enacted on the present fee.
They say the change would ask the very best earners to contribute to Social Security on the similar fee as different employees.
“This is a no brainer: the wealthiest Americans, who’ve benefited probably the most from America’s alternatives, ought to contribute the identical share of their earnings as a manufacturing unit employee in Chillicothe, Ohio, or a instructor in Worcester, Mass,” Moreno stated in a release concerning the proposal.
- For a employee incomes $1 million, that might make one other $815,500 of wages topic to the Social Security tax.
- At the present 6.2% fee, that is about $50,561 extra in Social Security taxes for the worker.
- The employer would typically owe one other $50,561.
Warren and Moreno say the extra proceeds may assist defend Social Security advantages with out elevating the payroll tax fee for many employees (i.e., these whose wages stay beneath the taxable most).
“That one reform alone would affect about 6% of all households, the highest-earning Americans, and would defend Social Security advantages for at the very least 20 years,” Warren mentioned in a Senate Finance Committee hearing in August.
Eliminating the Social Security tax restrict would usher in substantial further proceeds, however how a lot it might enhance this system’s funds would rely partly on what occurs to advantages for prime earners.
For instance, utilizing its 2025 Trustees Report assumptions, the Social Security Administration modeled what would occur if the tax cap have been eliminated. In one model, excessive earners would pay Social Security taxes on all of their wages however would not obtain further SS advantages primarily based on the extra taxes they paid. That would shut about 67% of Social Security’s long-term funding hole.
But what if these further taxes additionally counted towards future advantages?
- High earners would get bigger Social Security checks in retirement.
- That would imply extra money coming into Social Security now, but additionally extra money going again out later.
- Under that strategy, the change would shut about 48% of the long-term funding hole.
In different phrases, the extra advantages excessive earners get from their further taxes, the much less the tax enhance would assist Social Security’s funds.
- The Tax Policy Center estimates that taxing all wages for Social Security would usher in about $2.5 trillion over 10 years (2026 by means of 2036), affecting about 6% of U.S. households.
- The Tax Foundation estimates that the change may usher in about $3.2 trillion over roughly 10 years, from 2027 by means of 2036. But after factoring in potential financial adjustments, it estimates the acquire can be nearer to $1.5 trillion.
*The estimates use completely different assumptions about how individuals and companies would possibly reply to greater payroll taxes and whether or not excessive earners would get larger Social Security advantages in return for paying extra.
Either manner, the analyses present that eliminating the tax cap may carry extra money into Social Security. But such a measure would not be sufficient to repair this system’s long-term cash issues by itself.
Impact on excessive earners?
For most employees, eliminating the Social Security tax cap would not change their paychecks. The proposed change would have an effect on employees who earn greater than the 2026 tax restrict of $184,500.
At the present 6.2% tax fee, here is what such a tax change would possibly appear to be for prime earners:
- $200,000 wage: About $961 extra in Social Security taxes annually
- $500,000 wage: About $19,561 extra annually
- $1 million wage: About $50,561 extra annually
Employers additionally pay a 6.2% Social Security tax, so their payroll taxes would additionally enhance on these further wages.
Note: Such a change would apply to wages, not all earnings. For instance, capital gains and dividends typically aren’t topic to the Social Security payroll tax. So two individuals with the identical complete earnings may see completely different impacts relying on how they earn their cash. Also, the above examples are for instructional functions solely and aren’t primarily based on current regulation.
The proposal raises one other essential query: Would excessive earners get extra Social Security benefits as a result of they’re paying taxes on extra of their wages?
That issues as a result of it may scale back how a lot the tax change helps Social Security. Giving excessive earners greater advantages would imply extra money going again out of this system later.
The Social Security Administration estimates that eliminating the tax cap with out giving excessive earners further advantages would shut about 67% of this system’s projected long-term funding hole. If these newly taxed earnings additionally counted towards future advantages, the advance can be about 48%.
Social Security solvency: Bottom line
For now, the Warren-Moreno strategy stays a proposal. And whereas eliminating the taxable most is not a novel concept, the newest push is noteworthy since Social Security’s monetary outlook is prime of thoughts for a lot of lawmakers, employees, and retirees.
Whether Congress takes this concept additional, or pursues different proposals like a flat-rate Social Security cost-of-living adjustment (COLA), or adding a new tax on net investment income over $400,000 along with eliminating the Social Security tax cap stays to be seen.
In the meantime, the SSA is predicted to announce the 2027 Social Security tax restrict in mid-October. That quantity will decide how a lot of a employee’s wages are topic to the 6.2% Social Security tax subsequent yr. Stay tuned.
