Arguments for and Against the Social Security Taxable Maximum

Proponents of increasing the limit on earnings subject to the Social Security payroll tax (or eliminating it altogether) argue that it would make the tax less regressive and be part of a solution to reduce the long-range deficit in the Social Security trust funds. An analysis from the Congressional Budget Office estimated that subjecting earnings already below the tax cap as well as earnings above $250,000 would decrease the deficit by approximately $1.4 trillion from 2025 through 2034. Another argument is that removing the taxable maximum would adjust for the fact that higher-income individuals generally have longer life expectancies and thus receive Social Security benefits for a greater amount of time.

Opponents argue that raising or eliminating the payroll tax cap will increase the benefits high earners receive because benefits are directly tied to contributions. If, in response, benefits were capped then opponents argue the character of the program would shift because benefits were originally intended to be related to how much one contributed to the program. Opponents also argue that raising or eliminating the payroll tax cap would not fully shore up the trust funds. Accompanying reforms, such as altering benefits, would also be required to steady Social Security’s long-run balance.

Some economists anticipate that if the tax cap was lifted, employers might respond by shifting taxable compensation to a form of compensation that is taxed at a lower rate. For example, employers could decrease wages but increase retirement benefits, which are deductible under the corporate income tax, in an effort to offset the additional payroll taxes they would owe.

What Is the Medicare Payroll Tax?

Employees and employers each contribute 1.45 percent of earnings by workers to Medicare, which is levied on all income. Since 2013, an additional 0.9 percent tax has been imposed on employees with earnings exceeding a threshold between $125,000 and $250,000, depending on filing status; those additional taxes are not matched by the employer.

The revenues from payroll taxes help fund Medicare’s HI trust fund, which is used to pay for hospital stays and a few forms of home healthcare, such as hospice care. In 2025, HI tax revenues were 1.3 percent of GDP, an amount that has been relatively constant for 30 years. The HI tax was originally the primary source of revenues for Medicare before the program grew to include Medicare Advantage plans and prescription drug coverage. HI payroll taxes now make up 33 percent of Medicare’s income (excluding interest income), a share that is projected to continue to decrease going forward.

The HI trust fund is projected to become depleted in 2033, at which point it will only be able to pay 89 percent of benefits. Proposals to increase revenues for the program focus on increasing the program’s tax base because only around 60 percent of total income is subject to such taxes. Two areas of income missing from the base are from active pass-through income, in which a tax would mostly affect high earners, and from employer-provided benefits, in which a tax would mostly affect middle-income households.

Are There Other Federal Payroll Taxes?

In addition to FICA or SECA taxes, a few other payroll taxes are levied on certain employees:

• Federal Unemployment Tax Act (FUTA) taxes are only paid by employers, at a rate of 6 percent for the first $7,000 of earned income per employee. FUTA taxes support funding for state-administered unemployment insurance programs. Employers may qualify for a 5.6 percent tax credit, reducing the after-credit rate to 0.6 percent.
• Railroad Retirement Act taxes are paid by railroad employees and employers to fund retirement programs for railroad workers.
• Other payroll taxes are mostly comprised of taxes paid by federal employees to fund their own retirement programs.

How Do Payroll Taxes Work in Other Countries?

Many countries in the Organization for Economic Co-operation and Development (OECD), a group of nations with high-income economies, also fund their social insurance programs with payroll taxes. While the Social Security systems of other countries take different forms, most provide government-financed pensions that provide income assistance for retirees, similar to that of the United States.

Despite that similarity, there is much variation in how other OECD countries impose payroll taxes on their citizens. Countries such as the Netherlands, Sweden, Germany, and Canada have caps on taxable earnings that are lower than in the United States; others, such as Norway and Ireland, tax all earnings. Generally, countries with higher payroll tax rates have lower caps, while countries with lower payroll tax rates, like the United States, tend to have higher caps or no caps at all.

Several countries, including the United Kingdom and Austria, have a bracketed payroll tax structure that levies the payroll tax at different rates depending on total income, similar to how the United States levies income taxes. In the United Kingdom, that bracketed system is regressive in structure, while in Austria it is progressive.

Finally, in some OECD countries, social insurance programs are funded through other sources such as income taxes or excise taxes. Australia uses its general fund to finance its social insurance program, which targets those in need. That program works in tandem with a mandatory, employer-sponsored retirement plan to help workers save for retirement during their working years.