The Outlook for the Social Security Cap

The amount of workers’ earnings subject to Social Security taxes, known as maximum taxable earnings, is capped each year. Periodically, the federal government increases the Social Security cap. In 2022, the maximum earnings subject to Social Security taxes is $147,000, up from $142,800 in 2021.

These increases are meant to keep benefits on track with inflation or the pace of rising prices in the economy. As a result of the cap increase, high-income workers will pay a few hundred more dollars in Social Security taxes next year.

It remains to be seen, however, whether recent cap increases will be enough to plug the significant Social Security shortfalls. Based on recent estimates, it would appear that much more drastic changes are needed to ensure future benefits are paid out as promised. Here is a look at the issues.

Key Takeaways

  • The Social Security cap, or the annual earnings on which Social Security payments are calculated, increased $4,200 to $147,000 for 2022.
  • The combined trust funds of Social Security and Disability Insurance (DI) held nearly $3 trillion in 2020 but are projected to run out of money by 2034.
  • The Social Security retirement fund will be depleted earlier, in 2033; after that point, only 76% of the scheduled benefits will be paid.
  • Solving the long-term funding problem will probably require higher Social Security taxes, lower benefits, and indexing the retirement age to life expectancy.

The Social Security Cap Increase for 2022

The 2022 Social Security cap represents a $4,200 increase over 2021. The table below shows the annual increases in the Social Security tax cap for the past 13 years.

While the Social Security tax burden appears to hit the self-employed harder than employees, the reality is that employers have to think of their share of the Social Security tax as part of employees’ earnings, which increases their labor cost and requires them to lower the amount they pay out in salaries or wages.

Social Security Administration Social Security Changes, 2010–2022
Year Maximum Taxable Amount % Increase
2022 $147,000 2.9%
2021 $142,800 3.7%
2020 $137,700 3.6%
2019 $132,900 3.5%
2018 $128,400 1%
2017 $127,200 7%
2016 $118,500 0%
2015 $118,500 1%
2014 $117,000 3%
2013 $113,700 3%
2012 $110,100 3%
2011 $106,800 0%
2010 $106,800 0%

Source: Social Security Administration

According to the Social Security Administration (SSA), beneficiaries of Social Security and Supplemental Security Income (SSI) will receive a 5.9% cost-of-living adjustment (COLA) in 2022. The COLA adds to monthly benefits to adjust for inflation.

Your monthly benefit will depend on your situation, such as whether you’re part of a retired couple, or a widow, or have children. On average, a retired worker who received $1,565 per month before the COLA will get $1,657 monthly in 2022 after the COLA.

Example of the Social Security Cap

A worker who earned $127,200 in 2016 would have paid Social Security taxes of 6.2% on $118,500, or $7,347. Their employer would have paid another $7,347 in Social Security taxes. If that individual was self-employed, the employer portion was the individual’s responsibility.

A worker who earned $127,200 in 2017 would have paid Social Security taxes of 6.2% on all $127,200 of income, or $7,886.40, an increase of $539.40. The employer (or the individual, if self-employed) would have matched that higher amount.

Long-Term Funding Problem

The federal Social Security program that pays retirement, disability, and survivors insurance benefits is in serious trouble. These benefits are paid from two trust funds: the Old-Age and Survivors Insurance (OASI) Trust Fund and the Disability Insurance (DI) Trust Fund.

The combined trust funds held $2.9 trillion at the beginning of 2020 but are projected to run out of money in 2034, according to the SSA. That date is soon enough to affect millions of current and future retirees.

Social Security (OASI) Retirement Benefits

The Social Security fund (OASI) will run out of money earlier than the combined trust funds. Social Security benefits are paid out of the Social Security taxes collected from current workers and the interest payments that the government collects on Treasury bonds.

According to the SSA’s 2021 annual report, retirement benefits will be paid on schedule until 2033. After that point, the fund will be exhausted, and only 76% of the scheduled benefits will be able to be paid from continuing tax income. Congress will need to make changes to replenish the fund so that retirees can continue to be paid the full coverage.

The 2021 financial projections include the SSA’s best estimates as to the impact of the COVID-19 pandemic, but the report noted that the fund had been significantly affected by the pandemic and the 2020 recession.

Disability Insurance (DI) Trust Fund

The 2021 annual report showed that the Disability Insurance (DI) Trust Fund, which pays disability benefits, is forecasted to make scheduled benefit payments until 2057. At that time, the fund’s reserves will be depleted, and continuing tax income will be enough to pay 91% of scheduled benefits.

Reasons for the Shortfalls

The large number of baby boomers entering retirement, combined with the smaller quantity of younger generations working and paying into Social Security, is a major cause of the shortfall. In 1975, there were 3.2 workers to support every retired beneficiary. In 2021, there were just 2.7 workers, and in 2040, there might be only 2.1 workers.

In 2021, the Congressional Budget Office (CBO) estimated that the projected increase in Social Security spending was not as dramatic as might be expected: from 5.2% of gross domestic product (GDP) in 2021 to 6.3% in 2051. 

What is the Social Security Tax cap for 2022?

The maximum amount of income subject to the Social Security tax is $147,000 in 2022, up from $142,800 in 2021.

How much longer will Social Security last?

Based on current laws, Social Security is poised to exhaust the funds in its trusts by 2034. However, that date isn’t set in stone and could be subject to change, depending on which measures are introduced.

Will there be Social Security in the future?

If more money isn’t funneled into Social Security, the surplus is on course to run out in 2034. At that stage, the Social Security Board of Trustees estimates that the “hypothetical combined OASI and DI funds” will be able to pay only 78% of scheduled benefits.

The Bottom Line

Increasing the Social Security cap helps—but does not solve—the impending Social Security shortfall. The tax cap would have to be eliminated entirely to close a significant percentage of the Social Security gap, according to calculations by the Committee for a Responsible Federal Budget, a think tank that publicizes Social Security and other federal budget issues.

Even that drastic measure would be far from a complete fix. Truly solving the problem will require a combination of measures, such as higher Social Security taxes, lower benefits (perhaps only for the well-off), and indexing the retirement age to life expectancy.

Article Sources

Investopedia requires writers to use primary sources to support their work. These include white papers, government data, original reporting, and interviews with industry experts. We also reference original research from other reputable publishers where appropriate. You can learn more about the standards we follow in producing accurate, unbiased content in our editorial policy.
  1. Social Security Administration. “2022 Social Security Changes.” Accessed Dec. 22, 2021.

  2. Social Security Administration. “2021 Social Security Changes,” Page 1. Accessed Dec. 22, 2021.

  3. Social Security Administration. “Summary: Actuarial Status of the Social Security Trust Funds.” Accessed Dec. 22, 2021.

  4. Social Security Administration. “A Summary of the 2021 Annual Reports.” Accessed Dec. 22, 2021.

  5. Social Security Administration. “What Are the Trust Funds?” Accessed Dec. 22, 2021.

  6. Social Security Administration. “2021 OASDI Trustees Report: B. Long-Range Estimates.” Accessed Dec. 22, 2021.

  7. Congressional Budget Office. “The 2021 Long-Term Budget Outlook,” Page 18 (Page 22 of PDF). Accessed Dec. 22, 2021.

  8. Committee for a Responsible Federal Budget. “Rep. Larson Proposes Social Security Reform.” Accessed Dec. 22, 2021.

Take the Next Step to Invest
×
The offers that appear in this table are from partnerships from which Investopedia receives compensation. This compensation may impact how and where listings appear. Investopedia does not include all offers available in the marketplace.
Service
Name
Description