The Social Security trust fund stands just six years away from its projected 2032 insolvency, which under current law would trigger a 22 percent reduction in benefits. Senators Bernie Moreno (R-OH) and Elizabeth Warren (D-MA) are working across the aisle to promote solvency reforms, and propose what the lawmakers call a “no-brainer” solution: applying Social Security's 12.4 percent payroll tax to all annual earnings rather than just an individual's first $184,500. Unfortunately, uncapping the tax would undermine the program's social insurance status, harm the economy, starve other policy priorities, and not even save Social Security.
Despite often being considered an “easy” way to avert insolvency, imposing the full 12.4 percent Social Security payroll tax on all wages has been consistently rejected by both Republican presidents and Democratic Presidents Clinton, Obama, and Biden, and it has never been brought to the congressional floor for a vote by either party. Several drawbacks ultimately push political leaders away from this policy.
Social Security would return to deficits in four years
New TPC analysis shows why the proposal may seem attractive: It would increase federal revenues by about $2.5 trillion over the 2026–2036 period. In 2026, it would affect individuals with high earnings, increasing taxes for about 6 percent of tax units by an average of about $22,000.
But even that large tax increase would not save Social Security. Despite Moreno and Warren asserting that eliminating the cap would “save” Social Security, the Social Security Administration calculates that such a policy would keep the system out of deficit for a mere four years and close only about half of its long-term shortfall. And that is the best-case scenario—one in which the new taxes earn no corresponding benefit credits and this significant tax produces no disincentives to work or to report earnings.
This policy would extend the Social Security trust fund into the 2050s, but the trust fund cannot finance future benefits or close program shortfalls. It is merely an accounting mechanism tracking Social Security’s past surpluses and the future deficits that the system is allowed to run. The annual cash shortfall figures are more important, because those amounts must be funded with new budget deficits each year.
The contribution-benefit link would be severed
While closing even half of Social Security's fiscal gap may count as progress, the policy carries substantial downsides. Social Security’s sacred public standing rests on its “earned benefit” structure: a pension-style system in which tax contributions determine future benefits. Its tax is capped because benefits are also capped. A billionaire pays Social Security taxes on only $184,500 in wages (adjusted annually for inflation) because wages above that amount do not count toward future benefits. Uncapping the tax without matching benefit credits would sever the contribution-benefit link on which Social Security's earned-benefit status rests—the very structure that Moreno and Warren seek to protect.
Marginal tax rates could reach destructive levels
A 12.4-percentage-point increase in marginal tax rates is also substantial, and it would apply not just to millionaires but to many professionals in high-cost urban areas. This tax could ultimately squeeze other spending priorities by pushing marginal tax rates to the revenue-maximizing rate, or even beyond it.
Specifically, the current top marginal tax rate on labor income is just under 55 percent in California and above 50 percent in New York once federal income taxes, state income taxes, and payroll taxes are included. Uncapping the payroll tax would push these rates into the 60s. And yet the range of economic research suggests that the revenue-maximizing tax rate for labor falls somewhere between 50 percent and 73 percent.
Raising marginal tax rates past those levels could lose revenue as high earners shift income into lower-tax forms of compensation (such as capital gains) or to lower-tax jurisdictions. Higher rates could also prompt a household's second earner to drop out of the paid workforce and spend more time at home with their children.
And pushing marginal tax rates to revenue-maximizing levels isn’t necessarily wise tax policy. As rates rise toward that level, the additional revenue raised shrinks while creating larger economic costs, including more tax avoidance, income shifting, and reduced incentives to work—until rates reach the point where the damage cancels out 100 percent of any further revenue. Better to cap rates a bit below these peaks than to endure deepening economic damage just to squeeze out the last few dollars.
Other policy priorities could be squeezed
If lawmakers decide to raise about $2.5 trillion from high earners over the next decade by increasing payroll taxes by 12.4 percent—reaching revenue-maximizing rates and thus using much of the available room to tax the rich further—they will have decided that older adults get the first claim on all tax-the-rich revenues. This would leave little remaining room to tax the rich to finance education, climate, health care, childcare, the safety net, or other priorities. Is this a wise use of all such tax revenues?
After all, today's older adults comprise the wealthiest generation in American history, and most receive Social Security benefits that well exceed their lifetime contributions, even adjusted for net present value. They have a true poverty rate of just 6 percent, and Social Security reform could easily guarantee a minimum income of 125 percent of the federal poverty line without significant new costs.
In short, Social Security today often redistributes income upward rather than downward—with trillions of dollars scheduled to be spent over the next decade on families with post-retirement incomes exceeding $150,000 and often no remaining mortgage, child-rearing, or student loan costs.
Perhaps, instead of maximizing taxes on high earners to guarantee wealthier seniors Social Security benefits often exceeding $100,000 per family, lawmakers might consider trimming the benefits of high earners and saving potential tax-the-rich revenues for other spending priorities.
