Why some Washington lawmakers want to tax high earners

Washington lawmakers have a new deadline by when to fix Social Security‘s retirement trust fund, based on a new annual report released this month by the program’s trustees.

In the fourth quarter of 2032, that trust fund — called Old-Age and Survivors Insurance, or OASI — may be depleted, when 78% of benefits will be payable, according to Social Security trustees’ latest projections.

The new projection is several months sooner than had previously been estimated for that fund, which Social Security relies on to pay monthly benefits to million of retired workers, their spouses and children, and survivors of deceased workers.

That has led to a renewed push to tax the rich to shore up the program’s finances.

On Tuesday, Sens. Elizabeth Warren, D-Mass. and Bernie Moreno, R-Ohio, co-wrote an op-ed that said they are working together on legislation to lift the payroll tax cap to help improve Social Security’s solvency.

Currently, earnings up to $184,500 are subject to Social Security payroll taxes. High earners do not pay into the program for the rest of the year once they hit that cap. On March 9, individuals with $1 million in annual wage and salary earnings stopped paying Social Security payroll taxes for 2026, according to the Center for Economic and Policy Research.

At a Wednesday Senate Finance subcommittee hearing on the future of Social Security, Sen. Bernie Sanders, I-Vt., said it’s time to “ask the wealthiest people in this country, who have never had it so good, to start paying their fair share of taxes.”

Sanders has proposed a bill, the Social Security Expansion Act that is co-sponsored by Warren and nine other Senate Democrats, that would raise taxes on wages, salaries and self-employment earnings over $250,000 while providing certain benefit increases. The proposal also calls for increasing the net investment income tax while making active trade or business income subject to those levies.

Another bill proposed by Rep. John Larson, D-Conn., the Social Security 2100 Act, would make it so income over $400,000 is subject to Social Security payroll taxes while also providing benefit increases. That proposal, which was put forward in 2023, has not been reintroduced in this session of Congress. It had 189 Democratic co-sponsors.

Moreno’s support is an “enormous breakthrough” amid Democratic leaders’ efforts to build a coalition to address this issue, Larson said in a statement.

The payroll tax cap is adjusted every year to keep pace with national wage growth. Consequently, the gap between that wage base and any threshold at which payroll taxes are reapplied — whether it be $250,000 or $400,000 — would eventually close over time.

Social Security reform enacted in 1983, when the program’s funding was running low, was aimed at providing 75-year solvency, which would have brought the program to 2058.

Yet that time horizon was cut short, mostly due to rising income inequality and the impact of the Great Recession, according to Stephen Nuñez, director of stratification economics at the Roosevelt Institute, a left-leaning think tank.

In 1983, the Social Security payroll tax cap was sufficient to cover 90% of eligible earnings, Nuñez said, and the reforms assumed that would continue going forward.

But by 2000, FICA taxes only captured about 82.5% of taxable income and have stayed at that level, he said.

“That was a huge, huge decrease in expected revenue at a time when the program was meant to be building reserves,” Nuñez said.

How much raising the payroll tax cap could extend Social Security’s solvency today depends on the specific changes, including whether they would be paired with benefit increases.

Social Security was enacted to provide basic economic security when wages are lost due to old age, disability or death, Nancy Altman, president of Social Security Works, an advocacy organization focused on expanding benefits, said at Wednesday’s Senate subcommittee hearing.

The first question that should be addressed in reform is, “What level of benefits should Social Security provide?” Altman said.

Today’s benefits are “low by virtually any measure,” she said. Cutting benefits would hurt retirees who are already struggling financially, as well as the economy, Altman said.

Yet if those tax increases are imposed on pass-through small businesses, whose profits are included on owners’ personal tax returns, that could hurt their ability to invest in growth and create jobs, Elizabeth Milito, vice president and executive director of the National Federation of Independent Business Small Business Legal Center, said at the Senate subcommittee hearing.

In response, Sanders said his bill would exclude the “vast majority” of small business owners from paying additional taxes since they would fall under the $250,000 threshold.

Yet it remains to be seen whether lawmakers on both sides of the aisle would be willing to pass a package to raise taxes.

“The present value of Social Security’s unfunded obligations is a staggering $30 trillion,” Sen. Chuck Grassley, R-Iowa, chair of the Senate Finance subcommittee on Social Security, pensions and family policy, said during Wednesday’s hearing.

“This fiscal hole cannot realistically be plugged simply through tax hikes on the wealthy, that’s the Democrats’ favorite solution, or by cutting waste, fraud and abuse, which is the Republicans’ favorite solution,” Grassley said.

Any new reforms to Social Security must be bipartisan, Shai Akabas, vice president of economic policy at the Bipartisan Policy Center, said during Wednesday’s Senate subcommittee hearing. Senate rules require 60 votes for Social Security reform to pass, and “no party is likely to get there alone,” he said.

The Bipartisan Policy Center, a think tank that promotes bipartisanship, agrees that raising the taxable maximum on Social Security should be considered as part of comprehensive reform, Akabas said.

But there is limited ability to raise taxes to address all issues that need to be solved, including closing the growing federal deficit, he said.

“We think a balance that includes both additional revenue to the program and benefit adjustments are necessary,” Akabas said.