Social Security: Raising or Eliminating the Taxable Earnings Base

Publication Date: January 2006

Publisher: Library of Congress. Congressional Research Service

Author(s):

Research Area: Banking and finance

Type:

Abstract:

Social Security taxes are levied on earnings up to a maximum level set each year. In 2006, this maximum -- or what is referred to as the taxable earnings base -- is $94,200. The taxable earnings base serves as both a cap on contributions and a cap on benefits. As a contribution base, it establishes the maximum amount of earnings for each worker that is subject to the payroll tax. As a benefit base, it establishes the maximum amount of earnings used to calculate benefits.

Since 1982, the Social Security base has risen at the same rate as average wages in the economy. However, the percent of covered earnings that are taxable have decreased from 90% in 1982 to 85% in 2004. The percentage of covered earnings that is taxable is projected to decline to about 83% for 2014 and later. Since the cap was indexed to the average growth in wages, the share of the population below the cap has remained relatively stable at roughly 94%. Of the 8.5 million Americans with earnings above the base, roughly 80% are men and only 9% had any earnings from self-employment income. New Jersey has the highest share of the population above the maximum (10%) and South Dakota has the lowest share (2%).

Raising or eliminating the cap on wages that are subject to taxes would reduce the long-range deficit in the Social Security Trust Funds. For example, raising the maximum taxable earnings from $94,200 to $150,000 -- roughly the level needed to cover 90% of all earnings -- would eliminate roughly 40% of the long-range shortfall in Social Security. This change would generate $182 billion over the fiveyear budget window of 2006-2010 and $433 billion in additional revenue between 2006-2015. If all earnings were subject to the payroll tax but the base was retained for benefit calculations, the Social Security Trust Funds would remain solvent for the next 75 years. However, the link between contributions and benefits would be broken.

There is no similar earnings base for the Medicare Hospital Insurance (HI) portion of the payroll tax; all earnings are taxable for HI purposes. Elimination of the HI base was proposed by President Clinton as a way to raise revenue and enacted in 1993, effectively beginning in 1994.

This report will be updated as legislative activity warrants.