Eliminating the Payroll Tax Cap Still Leaves a Hole

One of the most common claims in debates over Social Security is that the program’s financing problems could be solved simply by eliminating the payroll tax cap and applying Social Security taxes to all earnings. Now Republican Senator Bernie Moreno and Democratic Senator Elizabeth Warren have teamed up to call for “lifting the Social Security payroll tax cap.”

While this proposal would raise additional revenue for the program, the Social Security Administration’s own estimates show that it would not come close to solving the program’s long-term $29 trillion solvency challenge.

According to the 2026 Social Security Trustees Report, the program faces a 75-year actuarial deficit equal to 4.42 percent of taxable payroll. The report also projects an annual deficit in the 75th year of the projection period equal to 6.57 percent of taxable payroll. These figures illustrate that Social Security’s financing problem is not merely a short-term cash-flow issue but a persistent and growing imbalance between promised benefits and projected revenues.

The SSA’s Office of the Chief Actuary estimates that completely eliminating the taxable maximum beginning in 2026 and applying the full 12.4 percent payroll tax to all earnings—without providing additional benefits on those earnings—would improve the program’s actuarial balance by 2.55 percent of taxable payroll. On the surface, that appears substantial. However, when compared to the updated 2026 Trustees Report projections, the reform would eliminate only about 58 percent of the 75-year actuarial deficit. Even after imposing Social Security taxes on all earnings, the program would still face a remaining actuarial shortfall of approximately 1.87 percent of taxable payroll.

The picture is similar when examining the program’s long-run annual deficit. The proposal improves the annual balance in the 75th year by 2.6 percent of payroll. Yet the projected 2100 deficit is 6.57 percent of payroll. As a result, roughly 60 percent of the long-run financing gap would remain even after eliminating the taxable maximum.

Let’s look at the numbers:

· The Social Security shortfall is projected to be 1.5% of GDP on a permanent basis (reaching 2.2% of GDP by 2100).

· Eliminating the tax cap without increasing the benefits paid to high earners would raise less than 0.9% of GDP.

· In short: you’d solve a little over half of the problem.

Even with this bold policy change, the system would still be running a deficit.

There is another reason claims about “saving Social Security” through payroll tax increases should be viewed with caution. Much of the public discussion focuses on extending the life of the Social Security trust fund. Yet the trust fund itself contains no real economic resources available to pay future benefits. It is essentially an accounting record of past payroll tax surpluses that were spent elsewhere in the federal budget.

What matters economically is Social Security’s annual cash flow. Every dollar of benefits paid in 2030, 2040, or 2050 must ultimately come from taxes collected in those years, borrowing, or other federal revenues. The existence of a trust fund does not reduce the burden on future taxpayers. Rather, it serves as a legal mechanism allowing Social Security to run cash deficits for a period of time before automatic benefit reductions occur.

From this perspective, eliminating the taxable maximum looks less transformative than its advocates suggest. While the policy would improve Social Security’s finances, it would not fundamentally alter the program’s long-run trajectory. According to Social Security’s actuaries, lifting the cap might delay the program’s cash-flow deficits for a few years before deficits reemerge and begin growing once again.

More broadly, Social Security’s challenges reflect a demographic reality that tax increases alone cannot solve. An aging population means that a shrinking share of workers must finance benefits for a growing number of retirees. Raising taxes on high earners may postpone difficult choices, but it does not eliminate the underlying mismatch between promised benefits and the resources available to fund them.

The proposal also depends on breaking the link between what people pay into the system and what they get out of it. That’s a major shift in the nature of Social Security from a contributory program to something more like a welfare benefit. If we lift the tax cap but not the benefit cap, we’re asking top earners to subsidize the system without receiving additional benefits. That change in design would be both politically and philosophically contentious.

There is also reason to believe that the SSA’s estimates may overstate the revenue that could ultimately be collected from eliminating the taxable maximum. The actuarial projections largely assume that taxpayers continue working, investing, and reporting income much as they do today. In reality, significantly higher marginal tax rates tend to alter behavior.

What’s more, the projections by the trustees report are likely too optimistic. As Ramesh Ponnuru pointed out in the Washington Post: “They assume Americans will have more babies in the coming decades than either the Census Bureau or the Congressional Budget Office does, which would help Social Security’s finances.”

Consider a high-income earner in California. Such an individual may already face a 37 percent federal income tax rate, a 12.3 percent California income tax, the state’s additional 1 percent mental health services tax on very high incomes, the 2.35 percent Medicare payroll tax rate that applies to high earners (including the Additional Medicare Tax), and the 3.8 percent Net Investment Income Tax.

Eliminating the Social Security taxable maximum would add another 6.2 (or up to 12.4) percentage points to labor income above the current cap. The result would be a combined marginal tax burden exceeding 60 percent on some forms of earned income in states like California. Similarly, in New York City, with state and local taxes included, the top rate would be 64.1 percent.

A large body of research finds that high-income taxpayers respond to higher marginal tax rates by reducing taxable income through changes in work effort, compensation structure, timing of income, tax planning, and other legal forms of avoidance. This does not mean that higher tax rates raise no revenue, but it does mean that the revenue gains are often smaller than simple “static” calculations suggest. Consequently, the actual improvement in Social Security’s finances could be less than the SSA’s mechanical estimates imply.

Even if policymakers were willing to impose such large tax increases on a relatively small group of taxpayers, doing so would not resolve the broader fiscal challenge. Medicare’s long-term financing shortfall is even larger than Social Security’s. If lawmakers rely primarily on ever-higher taxes on top earners to close Social Security’s gap, they may find that the same tax base is expected to finance Medicare’s growing obligations as well.

Moreover, the United States already relies heavily on high-income households to finance the federal government. According to IRS data, the top 10 percent of earners pay more than 70 percent of all federal income taxes, while the bottom half of tax filers pay only a small fraction of total income tax revenue. Many lower-income households receive refundable tax credits that reduce their effective federal income tax burden to zero or below. Reasonable people can disagree about the ideal degree of tax progressivity, but it is difficult to argue that the United States finances its government primarily on the backs of low-income households.

Ultimately, eliminating the taxable maximum would be one of the largest tax increases available within the Social Security system, yet it would still leave a substantial portion of the program’s long-term financing gap unresolved. That reality underscores the scale of the challenge and suggests that durable reform will require more than simply taxing high earners at higher rates.