Social Security: Raising or Eliminating the Taxable Earnings Base

Publication Date: January 2004

Publisher: Library of Congress. Congressional Research Service

Author(s):

Research Area: Banking and finance

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Abstract:

Social Security taxes are levied on earnings up to a maximum level set each year. In 2004, this maximum -- or what is referred to as the taxable earnings base -- is $87,900. There is no similar base for the Medicare Hospital Insurance (HI) portion of the tax; all earnings are taxable for HI purposes. Elimination of the HI base was proposed by President Clinton and enacted in 1993, effectively beginning in 1994. Recently others have proposed that the base for Social Security be raised or eliminated as well. They complain that taxing earnings only up to a certain level creates a regressive tax. They point out that the 94% of all workers whose earnings fall below this level have a greater proportion of earnings taxed than the 6% whose earnings exceed it. They contend that the revenues generated by raising the level -- estimated at almost $100 billion in 2004 if all earnings were taxed -- could be used to reduce Social Security taxes for lower wage earners or help reduce the long-range actuarial shortfall in Social Security. Those who support retaining the base in its current form point out that Social Security's benefit formula favors low-wage earners by replacing a greater proportion of their earnings than it does for higher wage earners. They argue that the progressive benefits mitigate the regressive tax. They maintain that eliminating the base completely would cause enormous benefits to be paid to millionaires (since benefits are based on one's earnings record), weaken pensions and other forms of private savings, and ultimately erode public support for the program.