A proposal from Senators Bernie Moreno and Elizabeth Warren would lift the cap on earnings subject to Social Security payroll taxes, but the analysis argues that the change would not fully solve Social Security’s long-term funding problem and would create a major tax increase for higher earners.
For 2026, the Social Security payroll tax applies only to the first $184,500 of an employee’s wages. The rate is 12.4%, split evenly between employees and employers.
The current cap is tied to the program’s benefit structure: Social Security replaces income only up to the taxable maximum. The Moreno-Warren proposal would apply the payroll tax to all earnings above the cap, without a corresponding increase in benefits.
Social Security’s funding gap
The latest Social Security Trustees report shows that by the fourth quarter of 2032, the Old Age Survivors Trust Fund will be able to pay only 78% of scheduled benefits.
Under current law, if no changes are made, benefits would need to be reduced by 22% in 2032 to restore actuarial balance.
The program’s total shortfall over the next 75 years is estimated at $25 trillion, equal to about 1.3% of GDP.
Restoring solvency through 2100 using only the current payroll tax base would require an immediate across-the-board payroll tax increase of 4.25 percentage points.
According to Social Security Administration modeling, uncapping the payroll tax with no benefit changes would return the program to annual surpluses for only three years, through 2029. Annual deficits would resume after that.
The approach would close an estimated 67% of the long-run shortfall, leaving roughly one-third still to be addressed through other tax increases or benefit cuts.
Economic impact
The analysis describes a 12.4 percentage-point payroll tax increase above the current cap as the largest tax increase since 1982, equal to about 0.83% of GDP in 2027.
It would also raise top marginal tax rates significantly. A business owner in New York City could face a top marginal rate as high as 60%.
The article argues that higher marginal rates could reduce the expected revenue gain by encouraging behavioral changes, including shifts toward untaxed compensation such as employee fringe benefits or employer 401(k) contributions.
The Tax Foundation estimate finds that lifting the payroll tax cap would:
- Reduce long-run GDP by 1.5%
- Cost 1.8 million jobs
- Raise $3.2 trillion from 2027 through 2036 on a conventional basis
- Raise $1.5 trillion after accounting for negative economic effects
Effect on Social Security’s structure
The article argues that uncapping the payroll tax without adjusting benefits would weaken the link between taxes paid during a worker’s career and benefits received in retirement.
The current system is progressive but still tied to earnings. For workers who earn the taxable maximum, Social Security replaces about 26% of earnings on average, compared with 74% for the lowest earners.
The analysis argues that taxing earnings above the cap without providing additional benefits would move Social Security away from its earned-benefit model and closer to a conventional welfare program.
Alternative approach
The share of wages covered by the payroll tax has declined from 90% in 1982 to around 83% today. Earnings above the taxable maximum have grown, while the share of workers earning above the maximum has remained roughly constant at around 7%.
Instead of focusing the burden on workers earning above the taxable maximum, the article argues that a broader revenue approach could include applying payroll tax to certain fringe benefits, such as employer-sponsored health insurance.
The Tax Foundation estimates that eliminating the exclusion for employer-sponsored health insurance would raise $1.8 trillion over the next decade while reducing GDP by 0.2%.
Policy trade-offs
The article concludes that Social Security reform must address both taxes and expenditures. It argues that lifting the payroll tax cap alone would raise substantial revenue but would not fully restore solvency, would place a concentrated burden on higher earners, and would change the structure of the program without resolving the full long-term shortfall.
Source article: taxfoundation.org
