Don’t Bust the Cap: Problems with Eliminating the Social Security Tax Cap
"The Easy Solution?" Not So Much
Introduction
Social Security’s deepening funding shortfalls are driving the system’s trust fund to within a decade from insolvency, which would mean an immediate 23% reduction in benefits. Social Security’s program deficits—which budget experts have warned for decades would occur as the 74 million baby boomers retire—remain largely ignored by politicians and political activists. However, when pressed for solutions, both progressives and an increasing number of nonprogressives claim to have a simple and obvious answer: apply Social Security’s 12.4% tax rate to all wages, rather than continue to limit this tax to an individual’s first $168,600 earned annually (this cap is the limit for 2024, and it automatically rises with inflation).[1] Eliminating the tax cap is not typically presented as a partial solution to Social Security’s budget shortfalls, to be combined with other policies such as raising the eligibility age or trimming upper-income benefits. Rather, this policy is often sold as a singular cure-all that would bring permanent Social Security surpluses and thus avert the need for any benefit or eligibility age hikes.
Such savings assumptions are vastly overestimated, according to consensus estimates. And the prospect of imposing a steep 12.4% tax-rate increase on families that would be considered upper middle class in many metropolitan areas is so unpalatable that even the leading progressive Social Security proposals by Senator Bernie Sanders (D–VT)[2] and Representative John Larson (D–CT)[3] would reimpose this tax only beginning at the higher wages of $250,000 and $400,000, respectively (and neither bill comes close to achieving solvency purely on this policy).
While some changes to the Social Security tax cap should certainly be on the table, eliminating the cap would provide smaller than expected savings while imposing a substantial, mostly unanticipated, burden on other federal funding priorities. This issue brief details the six main drawbacks of uncapping the tax.