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 up with inflation based on changes in the National Average Wage Index.
For 2023, the maximum earnings subject to Social Security taxes is $160,200, up from $147,000 in 2022. As a result of the cap increase, workers earning at least $160,200 faced an annual increase of $818.40 in payroll taxes assessed at a 6.2% annual rate, while 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, 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 near future, nor are they likely to do so. In contrast, eliminating the cap entirely and taxing all earned income while continuing to cap the benefits would cover 73% of the projected funding shortfall, the Social Security Administration estimated. Eliminating the cap on payroll taxes and increasing benefits for high-income earners accordingly would still cover 57% of the projected shortfall.
- The Social Security cap, or the maximum annual earnings subject to Social Security taxes and considered in calculating benefits, increased to $160,200 for 2023.
- The combined trust funds of Social Security and Disability Insurance (DI) held $2.85 trillion at the end of 2021 but are projected to run out of money by 2035.
- The Social Security retirement fund is expected to be depleted earlier, in 2034; at that point, its receipts are expected to cover 77% of scheduled benefit payments.
- If Social Security is to remain self-financing, higher payroll taxes, lower benefits, or increases in the age at which benefits become available will be required.
The Social Security Cap Increase for 2023
The 2023 Social Security cap represents a $13,200 increase over 2022. The table below shows the annual increases in the Social Security tax cap for the past 14 years.
While the Social Security tax burden appears to hit the self-employed harder than employees, the reality is that employers' share of the payroll tax also lowers the compensation they offer to employees.
|Social Security Administration Social Security Changes, 2010–2023|
|Year||Maximum Taxable Amount||% Increase|
Source: Social Security Administration
Example of the Social Security Cap
A worker earning $170,000 in 2022 would pay Social Security taxes of 6.2% on $147,000 of that income, totaling $9,114 ($147,000 * 0.062). The employer would also have paid $9,114 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.
A worker earning the same $170,000 in 2023 could expect to pay Social Security taxes of 6.2% on $160,200 of income, or $9,932.40 ($160,200 * 0.062), representing an increase of $818.40 over 2022. The employer (or the individual, if self-employed) will have to match that higher amount.
Long-Term Funding Problem
The trust funds had a combined surplus of $2.85 trillion at the end of 2021 but were projected to spend all of that by 2035 amid projections of mounting annual shortfalls in receipts compared with scheduled benefit payments. 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 2034, at which point its receipts would cover 77% of the scheduled benefit payments.
The 2022 annual report by Social Security trustees noted economic recovery from the 2020 recession was faster and stronger than the prior year's report assumed, pushing back the projected depletion date by a year. At the same time, economic developments since the report's projections were developed in February 2022 added uncertainty about the path of the economy, the trustees said.
Disability Insurance (DI) Trust Fund
The 2022 annual report projected that the Disability Insurance (DI) Trust Fund, which pays disability benefits, will have sufficient funds to make scheduled benefit payments over the next 75 years. The prior year's report had predicted depletion in 2057. The number of disabled workers receiving benefit payments has been in decline since 2014, the trustees noted.
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. In 1975, there were 3.2 workers to support every retired beneficiary. In 2021, there were just 2.8 workers, and the 2022 annual report projects the ratio will continue to decline, to 2.3 workers per retiree by 2040.
In 2022, the Congressional Budget Office (CBO) estimated Social Security spending will increase from 4.9% of gross domestic product (GDP) in 2022 to 6.3% in 2052 as the number of beneficiaries grows from 66 million to 97 million.
What Is the Social Security Tax Cap for 2023?
Annual income subject to Social Security tax is capped at $160,200 in 2023, up from $147,000 in 2022.
How Much Longer Will the Surplus in the Social Security Trust Funds Last?
Based on current projections, Social Security is poised to exhaust the funds in its trusts by 2035; however, that date isn't written in stone and is subject to change with economic developments as well as measures Congress may take to ensure the program's solvency.
Will There Be Social Security in the Future?
Congress has repeatedly raised Social Security tax rates over the program's history to ensure its solvency, from 1% in 1937 to 6.2% in 1990, the last time they were increased. Given the projected growth in the number of constituents receiving Social Security benefits by the time the funds are set to be depleted, it would be unwise to write off another increase shoring up the system's finances.
The Bottom Line
Increasing the annual cap on income subject to Social Security taxes does not 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.
Social Security Administration. "Contribution and Benefit Base."
Congressional Research Service. "Social Security: Raising or Eliminating the Taxable Earnings Base," Page 17.
Social Security Administration. “Summary: Actuarial Status of the Social Security Trust Funds.”
Social Security Administration. “Status of the Social Security and Medicare Programs: A Summary of the 2022 Annual Reports.”
Social Security Administration. “What Are the Trust Funds?”
Social Security Administration. “2022 OASDI Trustees Report: B. Long-Range Estimates: Table IV.B3.—Covered Workers and Beneficiaries, Calendar Years 1945-2095."
Congressional Budget Office. “The 2022 Long-Term Budget Outlook,” Page 17.
Social Security Administration. "Social Security & Medicare Tax Rates."