The benefits payout formula is weighted toward lower-income earners. Image: J.J. Gouin/Shutterstock.com
By: FEDweek StaffA report for Congress has said that there would be several available options under one of the often-proposed ways boosting money flowing into the Social Security program, raising the threshold above which those taxes cut off.
The Congressional Research Service report notes that in recent years, only 6 percent of wage earners or self-employed persons have had earnings above that threshold, which in 2023 is $160,200. That number is increased annually based on average wage growth nationwide.
However, the report said that the percentage of all earnings that are taxed for Social Security under that formula has dropped to 81 percent in 2021 from 90 percent in 1980.
“The decline in this percentage was mainly due to salaries for top earners growing faster than the pay of workers below the cap, which means top earners had wage growth that was higher than average. Because increases in the taxable maximum are based on average wage growth, salaries for top earners increased faster than the taxable maximum,” it said.
It said that among the potential ways to change the tax base to bring more money into the program would be to annually set the cutoff figure so that it once again applies to 90 percent of all earnings. Other options, it said, include eliminating the cutoff entirely, or keeping the same formula but reinstating Social Security taxes for those with earnings above $250,000—creating a donut hole effect for earnings between the cap and that figure.
“Raising or removing the taxable earnings base could reduce Social Security’s long-term deficit (i.e., improve the long-term solvency of the program). The full impact of the policy change would depend on whether the earnings above the current-law maximum would also be counted toward benefits,” it said.
It listed options for the benefits payout formula, which is weighted toward lower-income earners, including paying no additional benefits for earnings beyond the cutoff, applying the current benefits formula to earnings above it, or applying a less generous benefits formula for earnings above it.
The CRS does not make policy recommendations.
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