"Save Social Security" Payroll Tax Cap Proposal: Details & Analysis

In The New York Times, Senators Bernie Moreno (R-OH) and Elizabeth Warren (D-MA) propose to “save” Social Security by lifting the cap on earnings subject to the payroll taxA payroll tax is a tax paid on the wages and salaries of employees to finance social insurance programs like Social Security, Medicare, and unemployment insurance. Payroll taxes are social insurance taxes that comprise 24.8 percent of combined federal, state, and local government revenue, the second largest source of that combined tax revenue.. While the proposal would generate substantial revenue, it would not fix the program’s long-run insolvency. It would, however, impose a steep taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. increase on higher earners, weigh on growth, and depart from the program’s original earned-benefit design.

The Proposal

For 2026, the payroll tax applies only to the first $184,500 of an employee’s wages, a threshold that is adjusted each year for growth in the national average wage index. The 12.4 percent payroll tax is split evenly between the employee and employer. The cap mirrors the benefit structure of the program: during retirement, Social Security replaces a share of income only up to that taxable maximum. The Moreno-Warren proposal would apply the payroll tax to all earnings above the cap, with no corresponding changes to benefits.

Solvency Crisis Would Remain Unresolved

To understand why this seemingly simple fix would not restore balance to the trust fund, we first need to grasp the scale of the problem. The latest Social Security Trustees report shows that by the fourth quarter of 2032, the Old Age Survivors Trust Fund (OASI) will be able to pay only 78 percent of scheduled benefits. This means that under current law, benefits would be reduced by 22 percent to restore actuarial balance in 2032 if no other changes are made to the program.

The total shortfall over the next 75 years equals $25 trillion, or about 1.3 percent of GDP. Absent other changes, restoring solvency through 2100 would require an immediate, across-the-board payroll tax increase on the current payroll tax baseThe tax base is the total amount of income, property, assets, consumption, transactions, or other economic activity subject to taxation by a tax authority. A narrow tax base is non-neutral and inefficient. A broad tax base reduces tax administration costs and allows more revenue to be raised at lower rates. of 4.25 percentage points.

The Social Security Administration (SSA) has modeled uncapping the payroll tax with no benefit changes and found it would return the program to annual surpluses for just three years, through 2029, at which point annual deficits would resume. At best, it would close 67 percent of the long-run shortfall, leaving the remaining third to be covered by higher taxes on other workers or by benefit cuts.

Uncapping the Payroll Tax Would Hurt the Economy

A payroll tax increase of 12.4 percentage points would be the largest tax increase since 1982, at about 0.83 percent of GDP in 2027, and would push top income tax rates punishingly high. A business owner in New York City, for instance, could face a top marginal rate as high as 60 percent—well above the approximately 52 percent revenue-maximizing rate recently estimated by Treasury and Joint Committee on Taxation economists. Lifting the payroll tax cap would exceed that revenue-maximizing rate in many cases, inducing behavioral responses that erode the revenue gain by causing excessive economic harm. Shifts to non-taxed compensation, such as employee fringe benefits or employer contributions to 401(k)s, would also be incentivized by uncapping the payroll tax.

We estimate that lifting the payroll tax cap would reduce long-run GDP by 1.5 percent and cost 1.8 million jobs. It would raise $3.2 trillion from 2027 through 2036 on a conventional basis and $1.5 trillion after accounting for the negative economic effects.

The Original Intent of Social Security

The Moreno-Warren op-ed overlooks what their proposal would do to the link between the taxes a worker pays over a career and the benefits collected in retirement. The current system preserves a relationship between the two, albeit imperfectly. On average, for workers who earn the taxable maximum, Social Security replaces about 26 percent of their earnings, compared to 74 percent for the lowest earners (see Table V.C7 in the Trustees report for the full picture). The lower replacement rate at the top is how the system stays progressive while still tying taxes paid to benefits earned.

Uncapping the payroll tax without adjusting the benefits (or offering a credit for earnings above the cap) would sever that link. Social Security would look less like the social insurance program it was designed to be and more like a conventional welfare program. If conventional welfare is what policymakers intend the program to become, they should say so plainly and explain to their constituents that uncapping the payroll tax is a major step in that direction.

A Sensible Path Forward

The share of wages covered by the payroll tax has shrunk in the past few decades, from 90 percent in 1982 to around 83 percent today. Earnings above the taxable maximum have grown over this period, while the percentage of workers earning above that maximum has been roughly constant at around 7 percent.

Rather than concentrate the burden of funding the Social Security system on the small share of the workforce that earns above the taxable maximum, a better way to increase payroll tax revenue would be to apply the tax to certain fringe benefits, such as employer-sponsored health insurance (ESI). We estimate that eliminating the exclusion for ESI would raise $1.8 trillion over the next decade with a smaller cost to the economy, reducing GDP by 0.2 percent.

Big Picture

It is good to see senators talking about the Social Security crisis that is rapidly unfolding. But any serious proposal has to grapple with the trade-offs of different reforms and accept that the fix will come from both sides of the ledger: taxes and expenditures. Restoring solvency without disproportionately burdening current workers should be paramount, but the Moreno-Warren proposal moves in the wrong direction.