A bill has been introduced in Congress that, if passed, would substantially increase the amount of Social Security tax that some taxpayers pay. In addition, the Social Security Administration (SSA) recently projected what the Social Security wage base will be in 2023 and future years.
The Social Security Act was signed into law by President Franklin D. Roosevelt on August 14, 1935. He called the plan for social insurance a safeguard “against the hazards and vicissitudes of life.” The law initially included old age assistance in the form of federal benefits. The benefits expanded over time to become the current Old-Age, Survivors, and Disability Insurance (OASDI). This is also known as Social Security and the program is funded through a payroll tax.
The first Social Security tax rate was 1%, from 1937 to 1949, when it increased to 1.5%. This initial tax rate was only deducted from employee paychecks. Employers began paying contributions to the OASDI fund in the 1960s. The current OASDI tax rate is 6.2% for employees and 6.2% for employers. Employers match the employee OASDI rate, so the total contribution is 12.4%.
The Taxable Wage Base
Wages and self-employment income above the Social Security wage base aren’t subject to Social Security tax. From 1937 to 1950, the 1.0% Social Security tax rate was capped for wages earned over $3,000. This annual taxable wage base has increased over time (see chart below). Typically, the wage base increases every year.
Social Security Wage Base Through the Years
On June 9, 2022, the “Social Security Expansion Act” was introduced in both the Senate and House by Senator Bernie Sanders (I-VT) and House Representative Peter DeFazio (D-OR). If passed, the bill would increase the Social Security taxable wage base and add a separate investment income tax, among other actions.
Senator Sanders issued a press release explaining the proposed law. One provision would apply the combined Old-Age, Survivors, and Disability Insurance (OASDI) or Social Security payroll tax rate (currently, 12.4%) on earnings above $250,000, effective for 2023 and later. It would also tax all earnings once the current-law taxable maximum exceeds $250,000 and wouldn’t credit the additional taxed earnings for benefit purposes.
The SSA said that, under the proposal, workers with covered earnings in excess of the higher of $250,000 and the current-law taxable maximum would, along with their employers, pay additional payroll taxes. Because the payroll tax would additionally apply to annual earnings in excess of $250,000 starting in 2023, payroll tax liability would increase in 2023 and later.
The SSA included a table and explained that a worker with earnings at twice the current $147,000 taxable maximum in years 2040, 2060, and 2090 would have payroll tax liability increased by 100%.
Another provision in the bill would apply a separate 12.4% tax on investment income as defined in the Affordable Care Act (ACA), payable to the OASI and DI Trust Funds with unindexed thresholds as in the ACA, effective for 2023 and later. The ACA thresholds are $200,000 for a single filer and $250,000 for a married couple filing jointly. Under this provision, there would be no limit on the amount taxed.
The SSA estimates that the enactment of this provision would reduce the long-range OASDI actuarial deficit by 1.95% of taxable payroll and would reduce the annual deficit for the 75th projection year (2096) by 2.31% of payroll.
SSA Responds to Proposed Law
On June 9, 2022, the SSA issued a letter in response to Senator Sanders’ and Representative DeFazio’s request for estimates of the financial effects on the legislation they introduced. The SSA stated that the estimates they provided reflect the intermediate assumptions of the 2022 Trustees Report.
According to the SSA, the enactment of the provisions in the legislation “would extend the ability of the OASDI program to pay scheduled benefits in full and on time throughout the 75-year projection period.” It added that “the date of projected depletion of the combined OASI and DI Trust Fund reserves is 2035 under the intermediate assumptions of the 2022 Trustees Report.”
Wage Base Projections
On June 2, 2022, the SSA’s Office of the Chief Actuary issued a report that projects the Social Security taxable wage base will increase to $155,100 next year. The SSA provides three forecasts for the wage base (intermediate, low and high cost). All forecasts predict an increase from $147,000 in 2022 to $155,100 in 2023.
Future intermediate forecasts are: $165,300 in 2024; $173,400 in 2025; $180,600 in 2026; $188,100 in 2027; $195,600 in 2028; $203,100 in 2029; $210,600 in 2030 and $218,400 in 2031.
Actual annual increases to the Social Security wage base are announced in October based on current economic conditions. As a result, the forecasts, especially the longer-range ones, may change.
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