The Outlook for the Social Security Cap

Workers and employers pay Social Security taxes on income up to an annual cap, also known as maximum taxable earnings. The federal government adjusts the Social Security cap annually to keep pace with inflation based on changes in the National Average Wage Index.

The maximum earnings subject to Social Security taxes in 2023 is $160,200, up from $147,000 in 2022. Workers earning at least $160,200 faced an annual increase of $818.40 in payroll taxes assessed at a 6.2% annual rate as a result of the cap increase. The self-employed above that earned income threshold could expect to pay an additional $1,636.80 at their 12.4% Social Security tax rate.

The Social Security cap does not apply to payroll tax deductions for Medicare hospital insurance, which is assessed at a 1.45% rate on employees and employers, and at a 2.9% rate for the self-employed.

The annual cap increases are not intended to address the big Social Security shortfalls projected in the future, nor are they likely to do so. Eliminating the cap entirely and taxing all earned income while continuing to cap benefits would cover 73% of the projected funding shortfall, according to estimations by the Social Security Administration. Eliminating the cap on payroll taxes and increasing benefits for high-income earners would still cover 57% of the projected shortfall.

The Social Security Cap Increase for 2023

The 2023 Social Security cap represents a $13,200 increase over 2022. This table shows the annual increases in the Social Security tax cap from 2010 through 2023.

The Social Security tax burden appears to hit the self-employed harder than employees, but the reality is that employers' shares of the payroll tax also reduces the compensation they offer to employees.

Source: Social Security Administration

Example of the Social Security Cap

A worker earning $170,000 in 2023 would pay Social Security taxes of 6.2% on $160,200 of that income, totaling $9,932.40. The employer would also have paid $9,932.40 in Social Security taxes for employing the worker. The self-employed are responsible for the employer's as well as the employee's share of payroll taxes on their earned income.

Long-Term Funding Problem

The federal Social Security program pays retirement and disability benefits from two trust funds: the Old-Age and Survivors Insurance (OASI) Trust Fund and the Disability Insurance (DI) Trust Fund.

The trust funds are projected to pay 100% of scheduled benefits up until 2034, and then 80% after that. This is a year earlier than was forecast in 2022. The program's long-term solvency has taken a hit amid the aging of the U.S. population as a result of rising life expectancy and falling birth rates, and as a consequence of baby boomer retirements.

Social Security (OASI) retirement benefits

Social Security's trust fund for retirees and survivors, OASI, is projected to run out of money in 2033, at which point its receipts would cover 77% of the scheduled benefit payments.

Disability Insurance (DI) trust fund

The 2023 annual report projected that the Disability Insurance (DI) Trust Fund, which pays disability benefits, will have sufficient funds to make scheduled benefit payments until 2097. The prior year's report had predicted depletion in 2096. The trustees noted that the number of disabled workers receiving benefit payments has been in decline since 2014.

Reasons for the Shortfalls

The large number of baby boomers entering retirement has increased the proportion of Social Security beneficiaries relative to that of workers paying payroll taxes. There were 3.2 workers to support every retired beneficiary in 1975. There were just 2.7 workers in 2021 and the 2022 annual report projected the ratio will continue to decline to 2.2 workers per retiree by 2040.

The Congressional Budget Office (CBO) estimated Social Security spending will increase from 4.9% of gross domestic product (GDP) in 2022 to 6.4% in 2052 as the number of beneficiaries grows from 66 million to 97 million. 

Frequently Asked Questions

The Bottom Line

Increasing the annual cap on income subject to Social Security taxes doesn't address the program's projected long-term funding shortfall. It merely ensures that the cap keeps pace with inflation. The tax cap would have to be eliminated entirely, subjecting all income to Social Security taxes, to seriously shrink the budget gap.

Other policy options for ensuring the system's solvency include higher Social Security taxes, lower or means-tested benefits, and indexing the retirement age to life expectancy.