The amount of workers' earnings subject to Social Security taxes is capped each year (called maximum taxable earnings). The federal government increased the Social Security cap significantly for 2021. In 2021, the maximum earnings subject to Social Security taxes is $142,800.
These increases are meant to keep benefits on track with inflation. As a result of the cap increase, high-income workers will pay a few hundred more dollars in Social Security taxes next year.
Given that Social Security faces significant shortfalls that will make it impossible to pay out future benefits as promised without significant changes, will next year’s cap increase help Social Security last longer? Here is a look at the issues.
- In 2021, the Social Security cap, or the annual earnings on which Social Security payments are calculated, will increase from $137,700 to $142,800.
- The trust funds from which Social Security payments are made held nearly $3 trillion at the beginning of 2019 but are projected to run out of money in 2035.
- 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 2021
The 2021 Social Security cap increase is a $5,100 increase over 2020. The table below shows the annual increases in the Social Security tax cap for the past 10 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, 2010–2021|
|Year||Maximum Taxable Amount||% Increase|
Source: Social Security Administration
A worker who earned $127,200 in 2016 would have paid Social Security taxes of 6.2% on $118,500, or $7,347. His or her 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.
The 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 2018 but are projected to run out of money in 2035, according to the summary of the 2019 annual report from the Social Security and Medicare Board of Trustees. That date is soon enough to affect millions of current and future retirees.
Social Security benefits are paid out of the Social Security taxes collected from current workers and the interest payments the government collects on Treasury bonds. According to the Trustees’ intermediate assumptions, OASI and DI costs are projected to exceed total income starting in 2020, and reserves will become depleted in 2035. After 2019, the government will have to start dipping into the trust funds to make up the shortfall between Social Security revenues and the benefits it pays out.
In 2035, when the trust fund is projected to run out of money, there won’t be enough funds to pay the number of projected retirees at current benefit rates. The large number of baby boomers entering retirement, combined with the smaller younger generations who are working and paying into Social Security, is a major cause of the shortfall. Whereas there were 3.2 workers to support every retired beneficiary in 1975, today there are just 2.8 workers, and in 2040 there may be just 2.1.
In 2017, the Congressional Budget Office estimated that the projected increase in Social Security spending was not as dramatic as might be expected: from 4.9% of GDP in 2016 to 6.3 percent in 2046.
Social Security reform proposals aim to solve the shortfall. It is actually the DI Trust Fund that faces a more imminent crisis than the OASI Trust Fund, but since retirees are a much larger group than the disabled, the latter has received more press. Without Social Security reform, the Board of Trustees says expected tax income will be able to pay about three-fourths of expected benefits from 2034 on.
Increasing the Social Security cap helps, but it 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.
Social Security Administration. "2021 Social Security Changes." Accessed Oct. 15, 2020.
Social Security Administration. "What are the Trust Funds?" Accessed March 13, 2020.
Social Security Administration. "Status of the Social Security and Medicare Programs." Accessed March 13, 2020.
United States Government Accountability Office. "United States Government Accountability Office: Social Security Answers to Key Questions." Accessed March 14, 2020.
United States Government Accountability Office. "A Look at Our Future: When Baby Boomers Retire." Accessed March 14, 2020.
Social Security Administration. "Status of the Social Security and Medicare Programs." Accessed March 14, 2020.
Committee For a Responsible Federal Budget. "Rep. Larson Proposes Social Security Reform." Accessed March 14, 2020.