Raising the cap to $400,000

Besides the Sanders proposal, there have been a number of other proposals to increase, eliminate, or otherwise adjust the payroll tax cap as a way to shore up Social Security’s finances.

President Joe Biden has floated the idea of applying the Social Security payroll tax to earnings over $400,000 instead of the $250,000 proposed in the Sanders bill. This echoes his campaign stance not to raise taxes on anyone making less than $400,000 per year, which he reiterated during his State of the Union address in February.

Biden’s campaign proposal to increase the payroll tax cap to $400,000 would only delay Social Security’s insolvency until 2044. After that point, Social Security recipients would face the prospect of an 11% benefit reduction.

While Biden called for “protecting and strengthening” Social Security when introducing his fiscal 2024 budget in March, he stopped short of proposing a specific plan to address the trust fund shortfalls. He did hint at plans to work with Congress to strengthen the program, but without making any benefit cuts.

Another proposal aimed at raising the cap to $400,000 is the Social Security 2100 Act, first introduced by Rep. John Larson (D-CT) in October of 2021.

The Democrat-supported bill, which has not yet been reintroduced in Congress in 2023 and has no Republican support, would apply the Social Security payroll tax to earnings over $400,000 in addition to earnings below the current maximum taxable amount ($160,200). The gap—or “donut hole”—between the two would narrow over time as the maximum taxable amount increases and the $400,000 threshold remains unchanged.

A Fact Sheet from Larson’s website says the bill would mean “the wealthy pay the same rate as a waitress earning $30,000 a year. This provision would only affect the top 0.4% of wage earners.”

Per a blog from the Peter G. Peterson Foundation, since 1975, the taxable maximum has generally been increased each year based on an index of national average wages. About 6% of the working population earns more than the taxable maximum.

Low- and moderate-income individuals pay a higher proportion of their income in payroll taxes than do higher-income taxpayers. In part, that situation stems from the existence of the tax cap for Social Security. For example, someone with wage income of $67,000 per year would owe $4,154 for their share of Social Security taxes. However, someone with triple that income—or $201,000—would owe $8,854, which is just more than double the amount of tax.

The previous version of the bill includes 13 provisions that would increase Social Security benefits, 12 of which would be temporary, applying for only five years. Larson’s fact sheet says the bill would reduce Social Security’s 75-year shortfall by about half and extend “the date at which benefits would be cut by 20% by nine more years from 2035 to 2044.”

Next Page: Other ideas being floated