We recently examined Joe Biden’s Social Security plan, which would extend the program’s payroll tax to workers earning more than $400,000 a year and expand benefits. Our projections show Biden’s plan would boost median benefit payments, reduce poverty rates for retirees and people with disabilities, and improve the program’s finances.
Despite what some news outlets have reported, however, we did not find that Biden’s plan would increase taxes for middle-class workers. The plan’s tax hike would hit fewer than 1 percent of earners initially and would never affect more than the top 6 percent of earners.
Who would pay higher taxes?
Under current law, Social Security collects most of its revenue from a 12.4 percent payroll tax that is split evenly between workers and their employers. That tax is levied only on earnings up to a certain amount each year, set at $142,800 in 2021.
We project that in 2021, the year we assume Biden’s plan would begin, extending Social Security’s payroll tax to earnings above $400,000 would raise taxes for about one million workers, only 0.6 percent of the nation’s workforce. This estimate is consistent with recent Social Security data.
Because Biden’s plan would not index that $400,000 threshold, the tax expansion’s impact would increase over time as inflation and productivity growth increase the portion of workers who earn more than $400,000 a year. The share of workers paying more taxes under Biden’s Social Security plan would not reach 2 percent until 2035 and would approach 6 percent in 2048. Not all workers in the top 6 percent of the earnings distribution are super rich, but none are middle class.
As inflation and productivity growth continue, workers earning more than $400,000 eventually will make up more of the workforce. Even when that happens, however, our projections show that no more than 6 percent of workers would pay more Social Security payroll taxes under Biden’s plan than under current law. That’s because the current cap on Social Security payroll taxes increases over time with wage growth. The Social Security trustees’ intermediate-cost projections show the tax cap will reach $250,800 in 2035 and $408,600 in 2048.
Workers would pay more under Biden’s plan if their annual earnings exceed both Biden’s $400,000 threshold and Social Security’s tax cap. Once the tax cap exceeds that $400,000 threshold, the share of workers who would pay more under Biden’s plan would stabilize because the tax cap grows at the same rate as average wages. In 2060, only workers earning more than $643,200 would pay higher taxes.
Eventually, all workers with earnings that exceed Social Security’s tax cap would owe more payroll tax under Biden’s plan than under current law. Although these high-earners make up only about 6 percent of the national workforce, they are more common in high-wage, high-cost states like Maryland, Massachusetts, and New Jersey. But our analysis of American Community Survey data shows that even in those states, only about 10 percent of workers now earn more than Social Security’s tax cap.
Most of the additional payroll taxes collected by Biden’s plan would come from the very highest wage earners. If the payroll tax were levied on all earnings today instead of only earnings up to the tax cap, nearly three-quarters of new tax revenue would come from the top 1 percent of earners.
It’s time for a vigorous Social Security debate
Social Security faces a long-term financing gap that could within a decade jeopardize its ability to pay full benefits. The sooner policymakers act to close the shortfall through revenue increases, benefits cuts, or a combination, the less painful the adjustment will be. Biden’s plan does not eliminate the 75-year shortfall, but by closing about a quarter of the gap, it makes a significant down payment.
Biden’s plan raises important questions about Social Security’s future and the resources that should be devoted to retirement and disability programs. It would improve financial security for some low-income beneficiaries, but unlike some past center-left Social Security plans, it would not reduce scheduled payments to any beneficiaries, even those with the highest incomes. His proposal to expand Social Security and tackle its long-term financing challenges solely by increasing revenues from high-wage workers will leave federal policymakers with fewer resources to address other budgetary shortfalls, such as Medicare’s long-term deficit and the broader federal debt. His plan could also complicate efforts to meet other public priorities, such as rebuilding the nation’s infrastructure, tackling climate change, and confronting the aftermath of the COVID-19 pandemic.
But by developing a serious plan, Biden could jumpstart a long-overdue debate on how best to change Social Security for the 21st century.