Selected Research & Analysis: Social Security Taxes

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Related Fact Sheet

Taxable Maximum Earners
Population Profile (released March 2015)
Social Security Totalization Agreements
from Social Security Bulletin, Vol. 78, No. 4 (released November 2018)
by Brent W. Jackson and Scott Cash

Since the 1970s, U.S. negotiators have concluded bilateral agreements with 28 important trading partners to coordinate social security coverage and benefit provisions for individuals who live and work in more than one country in their working lives. Known as “totalization agreements,” they are similar in function and structure to treaties and are legally classified as congressional-executive agreements concluded pursuant to statute. The agreements have three main purposes: to eliminate double taxation on earnings, to provide benefit protections for workers who have divided their careers between the United States and another country, and to permit unrestricted payment of benefits to residents of the two countries. This article briefly describes totalization agreements, relates their history, and considers proposals to modernize and enhance them.

Distributional Effects of Applying Social Security Taxes to Employer-Sponsored Health Insurance Premiums
Policy Brief No. 2016-01 (released August 2016)
by Kathleen Romig, Dave Shoffner, and Kevin Whitman

This policy brief analyzes how applying the Social Security tax to employer-sponsored health insurance premiums could affect Social Security beneficiaries. Specifically, the brief examines an option presented by the Social Security Advisory Board in which both employee and employer premiums would count as wages for Social Security tax calculations, and later for benefit calculations. Using the Modeling Income in the Near Term model, the results show that for most Social Security beneficiaries aged 60 or older from 2017 to 2080, benefits would gradually increase and the poverty rate would decrease faster than the rate under current law. Counting employer-sponsored health insurance premiums as wages for Social Security purposes would increase Social Security taxes for most individuals and those taxes would increase more than Social Security benefits for individuals at all earning levels.

Effects of Employer-Sponsored Health Insurance Costs on Social Security Taxable Wages
from Social Security Bulletin, Vol. 73, No. 1 (released February 2013)
by Gary Burtless and Sveta Milusheva

The rising cost of employer contributions for employee health insurance reduces the percentage of compensation subject to Social Security payroll taxes. This article uses the Medical Expenditure Panel Survey to analyze trends in the cost of employer health insurance contributions relative to money wages and total compensation. The analysis shows how increasing employer health insurance premium costs from 1996 to 2008 reduced the percentage of compensation subject to payroll taxes, and it predicts the effects of health insurance reform on taxable compensation.

The Growth in Social Security Benefits Among the Retirement-Age Population from Increases in the Cap on Covered Earnings
from Social Security Bulletin, Vol. 72, No. 2 (released May 2012)
by Alan L. Gustman, Thomas L. Steinmeier, and Nahid Tabatabai

This article investigates how raising the maximum level of earnings subject to the Social Security payroll tax leads to the "leakage" of portions of the additional revenue into higher benefit payments. Using data from the Health and Retirement Study, the authors simulate the effects of changes in maximum taxable earnings for cohorts approaching retirement age over a 24-year period. They find, roughly, that almost half of the additional tax revenue from having raised the maximum earnings subject to the payroll tax has leaked into higher benefits.

The Evolution of Social Security's Taxable Maximum
Policy Brief No. 2011-02 (released September 2011)
by Kevin Whitman and Dave Shoffner

Since its inception, Social Security has featured a taxable maximum (or "tax max"). In 1937, payroll taxes applied to the first $3,000 in earnings. In 2011, payroll taxes apply to the first $106,800 in earnings. This policy brief summarizes the changes that have occurred to the tax max and to earnings patterns over this period. From 1937 to 1975, Congress increased the tax max on an ad-hoc basis. Increases were justified by the desire to improve system financing and maintain meaningful benefits for middle and higher earners. Since 1975, the tax max has generally increased at the same rate as average wages each year. Some policymakers propose increasing the tax max beyond wage-indexed levels to help restore financial balance and to reflect growing earnings inequality, as workers earning more than the tax max have experienced higher earnings growth rates than other workers in recent decades.

Distributional Effects of Raising the Social Security Payroll Tax
Policy Brief No. 2010-01 (released April 2010)
by Dave Shoffner

This policy brief analyzes the lifetime tax effects of two options for addressing the Social Security system's long-range solvency by raising the Social Security payroll tax rate. The first, an immediate increase, would have raised the payroll tax rate from its current 12.4 percent to 14.4 percent in 2006; the second, a phased increase, would raise the payroll tax rate to 14.5 percent in 2020, and then to 16.6 percent in 2050. The brief also analyzes a comparative scenario in which the current tax rate is maintained through 2041 and then raised each year as needed to pay scheduled benefits. The lifetime taxes of people born 1936–2015 are analyzed using Modeling Income in the Near Term (MINT) projections. Results show that the longer a tax rate increase is delayed, the fewer workers are affected, but also the higher the increase in lifetime taxes for later generations. The results also show that both options reduce the cross-cohort variability in the ratio of benefits received to taxes paid.

Distributional Effects of Raising the Social Security Taxable Maximum
Policy Brief No. 2009-01 (released July 2009)
by Kevin Whitman

As of 2009, Social Security's Old-Age, Survivors, and Disability Insurance program limits the amount of annual earnings subject to taxation at $106,800, and this value generally increases annually based on changes in the national average wage index. This brief uses Modeling Income in the Near Term (MINT) projections to compare the distributional effects of four options for raising the maximum taxable earnings amount beyond its scheduled levels. Two of the options would raise this value so that it covers 90 percent of all covered earnings and two would remove the maximum completely. Within each set of options, the proposals are differentiated by whether the new taxable amounts are used in computing benefits. Most workers would not be affected by these proposals, but some higher earners would experience a substantial increase in taxes. Correspondingly, benefit increases are largely isolated to higher earners, although the return in benefits for taxes paid would also decline. Because the proposals are targeted toward high earners, Social Security's progressivity would increase.

Financing Social Security 1939-1949: A Reexamination of the Financing Policies of this Period
from Social Security Bulletin, Vol. 67, No. 4 (released May 2008)
by Larry DeWitt

Presented is an examination of the financing history of the U.S. Social Security system from the passage of the original law in 1935 up through the enactment of the 1950 Amendments to the Social Security Act. In particular, it focuses on the 1939 Social Security Amendments and the subsequent tax rate freezes enacted between 1939 and 1949. It examines the origins of these taxing policies and assesses the impact of the rate freezes on the long-range actuarial balance of the Social Security program during this period.

Social Welfare Legislation, 1993
from Social Security Bulletin, Vol. 57, No. 2 (released April 1994)
by Rita L. DiSimone
Policy Analysis Through Microsimulation: The STATS Model
from Social Security Bulletin, Vol. 50, No. 12 (released December 1987)
by Bernard Wixon, Benjamin Bridges, and David Pattison
Evidence on the Effects of Payroll Tax Changes on Wage Growth and Price Inflation: A Review and Reconciliation
ORES Working Paper No. 34 (released April 1984)
by Richard F. Dye

The Social Security payroll tax rate is scheduled to increase by almost 1 percent for both employees and employers between now and 1990. One of the major elements of the recently adopted Social Security package was an acceleration of the timing of this increase. A number of economists have recommended that as an anti-inflationary policy scheduled increases be avoided or even that the current rates be rolled back.

A Comparison of Social Security Taxes and Federal Income Taxes, 1980–90
from Social Security Bulletin, Vol. 44, No. 12 (released December 1981)
by Bruce D. Schobel
Family Social Security Taxes Compared with Federal Income Taxes, 1979
from Social Security Bulletin, Vol. 44, No. 12 (released December 1981)
by Benjamin Bridges
A Comparison of Social Security Taxes and Federal Income Taxes
from Social Security Bulletin, Vol. 44, No. 7 (released July 1981)
by Bruce D. Schobel
Changing the Taxable Maximum: Effect on Social Security Taxes by Industry and Firm Size
from Social Security Bulletin, Vol. 43, No. 7 (released July 1980)
by Louis Esposito, David Podoff, and Aaron J. Prero
The Macroeconomic Effects of a Payroll Tax Rollback
ORES Working Paper No. 11 (released August 1979)
by John B. Hagens and John C. Hambor

In late 1977, the U.S. Congress passed Social Security legislation that included a series of increases in the payroll tax. These increases, which began in 1979 and carry on into the 1980s, substantially raise the projected levels of the Social Security trust funds. Since the amendments were passed, there has been some discussion and several proposals to roll back part of the tax. It is highly likely that additional rollback proposals will be made in the near future. The purpose of this paper is to shed some light on some of the macroeconomic effects of a payroll tax rollback.

Labor Supply, the Payroll Tax, and Internal Rates of Return to Social Security
ORES Working Paper No. 6 (released April 1979)
by Alan Freiden and Robert J. Mackay

There is empirical evidence that in the recent past the Old-Age Insurance portion of the Social Security program has acted as a net wage subsidy. In addition, the program had significant intragenerational redistributive effects. Our purpose is to demonstrate how these findings alter conventional views of the labor supply effects of Social Security. Our method is the analysis of a labor supply model that is extended to include empirically significant operational components of the program. We show that the analyses of others are special cases of our more general approach.

Federal Income Taxes, Social Security Taxes, and the U.S. Distribution of Income, 1972
ORES Working Paper No. 7 (released April 1979)
by Daniel B. Radner

This paper reports on estimates of federal income tax and Social Security tax liabilities of family units in 1972 and summarizes the methods used to make the estimates. Distributions of income both before and after subtracting those liabilities are shown. Several microdata files were combined using both "exact" and "statistical" matching of individual observations in the process of making these estimates.

Exemption of Clergyman from Social Security Coverage
from Social Security Bulletin, Vol. 35, No. 3 (released March 1972)
OASDHI Covered Employment of Foreign Subsidiaries, January-March 1968
from Social Security Bulletin, Vol. 34, No. 9 (released September 1971)
Maximum Taxable Earnings Under OASDHI, 1938–69
from Social Security Bulletin, Vol. 34, No. 8 (released August 1971)
by Michael Resnick
Estimating Distributions of Workers and Taxable Wages Under OASDHI
from Social Security Bulletin, Vol. 33, No. 3 (released March 1970)
by Gilda J. Garrett
OASDHI Covered Employment of Foreign Subsidiaries, January–March 1967
from Social Security Bulletin, Vol. 32, No. 3 (released March 1969)
Maximum Taxable Earnings Under OASDHI, 1938–66
from Social Security Bulletin, Vol. 31, No. 10 (released October 1968)
by Michael Resnick
Social Security Taxes and Total Payrolls
from Social Security Bulletin, Vol. 26, No. 8 (released August 1963)
by Robert J. Myers
Financing Public Welfare Programs
from Social Security Bulletin, Vol. 19, No. 2 (released February 1956)
by Wilbur J. Cohen
Social Security Employment Taxes
from Social Security Bulletin, Vol. 16, No. 8 (released August 1953)
What Contribution Rate for Old-Age and Survivors Insurance?
from Social Security Bulletin, Vol. 12, No. 7 (released July 1949)
by Robert M. Ball