SOCIAL SECURITY

MEMORANDUM 

Date: February 24, 2005 Refer To: TCA

To: Alice H. Wade, Deputy Chief Actuary 

From: Chris Chaplain, Actuary 

Subject: Estimated OASDI Financial Effects of Expanding the Amount of Covered Earnings Subject to 

the Payroll Tax--INFORMATION

This memorandum provides estimates of the financial effect on the Social Security (OASDI) 

program of expanding the amount of covered earnings that is subject to OASDI payroll taxes. 

The proposal would subject all earnings that are in excess of about $25,000 over the current 

taxable maximum to the OASDI payroll tax. Enactment of this proposal would be expected to 

restore solvency for the OASDI program through the 75-year long-range period. However, the 

criteria for sustainable solvency would not be met. This analysis was requested by Eva Cargill 

of Representative Wexler’s staff. The estimates are based on the intermediate assumptions of the 

2004 Trustees Report. 

Background 

The contribution and benefit base for Social Security (OASDI) is $90,000 for earnings in 2005. 

Under current law, this base will be indexed in future years to increases in the level of the 

average annual wage as measured by the SSA national average wage index (AWI). The 

contribution and benefit base serves the following two purposes: 

• As a contribution base, it establishes the maximum annual amount of covered earnings 

subject to OASDI payroll taxes. 

• As a benefit base, it establishes the maximum annual amount of earnings creditable for 

the purpose of benefit computation. 

The contribution and benefit base, which is often referred to as the maximum taxable earnings 

level, has generally been increased automatically each year since 1982 by the rate of growth in 

the average wage level in the U.S. economy. The percentage of covered earnings that is taxable 

has decreased from 90 percent in 1982 to about 85 percent in 2004. This is mainly due to 

relatively larger increases in earnings levels for those above the maximum. Under the 

intermediate assumptions of the 2004 Trustees Report, this percent of earnings that is taxable is 

projected to decline to about 83 percent for 2013 and later. 

Description of Proposal 

The proposal would continue to tax covered earnings up to the current-law contribution and 

benefit base ($90,000 in 2005). Earnings between the current-law contribution and benefit base 
2

and $114,900 (in 2005) would continue not to be subject to the OASDI payroll tax. However, 

earnings above $114,900 would be subject to the full 12.4 percent combined employee/employer 

payroll tax. The $114,900 threshold would be wage-indexed for years after 2005, in the same 

manner in which the current-law contribution and benefit base is indexed. Stated another way, 

this proposal would eliminate the contribution base except for earnings between $90,000 and 

$114,900 (in 2005). The current-law contribution and benefit base would continue to serve as a 

benefit base; only earnings up to the current-law contribution and benefit base would be credited 

in determining benefits. This provision would be effective for earnings in 2005 and later. 

For example, under this proposal a worker with covered earnings of $150,000 in 2005 would 

pay, along with this employer, a total of $11,160 of OASDI payroll tax on the first $90,000 of 

earnings. No payroll tax would be paid on the earnings between $90,000 and $114,900. The 

worker and employer would then pay a total of $4,352 on the earnings above $114,900 ($35,100 

X 12.4 percent). Therefore, total payroll taxes for this worker would be $15,512 under the 

proposal, compared to $11,160 under current law (earnings up to the current law wage base). 

The proposal would increase the long-range OASDI actuarial balance by an estimated 1.89 

percent of payroll tax. Thus, the 75-year long-range actuarial deficit of 1.89 percent of taxable 

payroll under present law would be eliminated and the resulting actuarial balance would be 

positive, but less than 0.005 percent of taxable payroll. However, the trust fund ratio would be 

declining at the end of the period, so sustainable solvency criteria would not be met. All 

estimates are based on the intermediate assumptions of the 2004 Trustees Report. 

Table 1 provides, for this proposal, individual-year estimates of: 

• The annual income rates, annual cost rates, and annual balance of the combined Trust 

Funds of the OASDI Trust Funds; 

• The trust fund ratio (TFR), defined as the amount of assets in the OASDI Trust Funds as 

of the beginning of the year, expressed as a percentage of the outgo from the OASDI 

Trust Funds during the year, and 

• The taxable payroll in current dollars, both under the proposal and under current law. 

The tables provide an analysis of the effects of the proposal on the financial status of the OASDI 

program. The table includes annual and 75-year-summarized cost rates, income rates, and 

balances for the OASDI program under the proposal. In addition, the table also provides the 

trust fund ratio for each year until the OASDI Trust Funds are projected to be exhausted. The 

TFR is defined as the amount of assets in the OASDI Trust Funds as of the beginning of the year, 

expressed as a percentage of the outgo from the OASDI Trust Funds during the year. Under 

present law, the OASDI Trust Funds are projected to become exhausted in 2042. Under this 

proposal, the OASDI Trust Funds would not be expected to become exhausted during the 75-

year long-range period. However, under the proposal, the projected trust fund ratio is decreasing 

at the end of the long-range period. Thus, sustainable solvency would not be achieved under this 

proposal and trust fund exhaustion would be likely within several years after the end of the 

period. 
3

The table also provides estimates of annual taxable payroll, in billions of current dollars, for the 

proposal and for present law. The percentage increases in taxable payroll due to the proposal are 

also included. 

 Chris Chaplain

Attachment 
Table 1 Financial Estimates for the OASDI Trust Fund Program 

Year Cost Rate

Income 

Rate

Annual 

Balance Proposed Plan Present Law

2004 11.07 12.71 1.64 306 4,522 4,522 0.0%

2005 9.54 12.69 3.15 325 5,427 4,762 14.0%

2006 9.43 12.69 3.26 362 5,709 4,999 14.2%

2007 9.39 12.71 3.31 398 5,998 5,244 14.4%

2008 9.42 12.74 3.32 432 6,308 5,502 14.7%

2009 9.53 12.73 3.20 462 6,628 5,770 14.9%

2010 9.63 12.75 3.12 492 6,957 6,047 15.0%

2011 9.76 12.79 3.03 520 7,296 6,331 15.3%

2012 9.96 12.82 2.86 544 7,635 6,614 15.4%

2013 10.17 12.84 2.67 566 7,978 6,901 15.6%

2014 10.39 12.86 2.46 585 8,339 7,213 15.6%

2015 10.64 12.87 2.23 601 8,711 7,534 15.6%

2016 10.90 12.89 1.98 614 9,097 7,868 15.6%

2017 11.18 12.90 1.73 625 9,498 8,214 15.6%

2018 11.46 12.92 1.46 633 9,915 8,575 15.6%

2019 11.75 12.94 1.19 638 10,343 8,944 15.6%

2020 12.04 12.95 0.91 642 10,789 9,329 15.7%

2021 12.34 12.97 0.63 643 11,247 9,724 15.7%

2022 12.62 12.99 0.37 644 11,722 10,135 15.7%

2023 12.91 13.00 0.10 643 12,213 10,557 15.7%

2024 13.18 13.02 -0.16 640 12,722 10,997 15.7%

2025 13.45 13.03 -0.42 636 13,250 11,453 15.7%

2026 13.71 13.05 -0.66 632 13,801 11,930 15.7%

2027 13.94 13.06 -0.88 626 14,380 12,428 15.7%

2028 14.16 13.08 -1.09 621 14,980 12,945 15.7%

2029 14.36 13.09 -1.27 615 15,604 13,486 15.7%

2030 14.54 13.10 -1.44 608 16,258 14,050 15.7%

2031 14.71 13.11 -1.60 601 16,940 14,639 15.7%

2032 14.86 13.12 -1.73 594 17,656 15,256 15.7%

2033 14.98 13.13 -1.85 587 18,404 15,899 15.8%

2034 15.08 13.14 -1.95 580 19,181 16,571 15.7%

2035 15.17 13.14 -2.03 573 19,991 17,272 15.7%

2036 15.23 13.15 -2.09 567 20,840 18,006 15.7%

2037 15.28 13.15 -2.13 560 21,729 18,771 15.8%

2038 15.31 13.15 -2.15 554 22,657 19,570 15.8%

2039 15.33 13.16 -2.17 548 23,619 20,401 15.8%

2040 15.34 13.16 -2.19 542 24,620 21,267 15.8%

2041 15.36 13.16 -2.20 536 25,665 22,172 15.8%

2042 15.37 13.16 -2.20 530 26,758 23,112 15.8%

2043 15.37 13.16 -2.21 524 27,895 24,091 15.8%

2044 15.38 13.16 -2.22 517 29,077 25,111 15.8%

2045 15.39 13.17 -2.22 511 30,301 26,170 15.8%

2046 15.40 13.17 -2.23 505 31,575 27,271 15.8%

2047 15.41 13.17 -2.24 498 32,904 28,415 15.8%

2048 15.42 13.17 -2.25 491 34,283 29,603 15.8%

2049 15.43 13.17 -2.26 485 35,712 30,835 15.8%

2050 15.46 13.17 -2.28 477 37,193 32,116 15.8%

2051 15.49 13.17 -2.31 470 38,738 33,450 15.8%

2052 15.52 13.18 -2.34 462 40,348 34,837 15.8%

2053 15.56 13.18 -2.38 453 42,032 36,285 15.8%

2054 15.60 13.18 -2.42 444 43,779 37,793 15.8%

2055 15.65 13.19 -2.46 435 45,593 39,359 15.8%

2056 15.69 13.19 -2.50 425 47,480 40,990 15.8%

2057 15.74 13.19 -2.55 415 49,447 42,682 15.8%

2058 15.79 13.20 -2.59 405 51,497 44,447 15.9%

2059 15.83 13.20 -2.63 395 53,630 46,287 15.9%

2060 15.88 13.20 -2.67 384 55,849 48,202 15.9%

2061 15.92 13.20 -2.72 372 58,156 50,193 15.9%

2062 15.97 13.21 -2.76 360 60,566 52,268 15.9%

2063 16.03 13.21 -2.81 348 63,073 54,426 15.9%

2064 16.08 13.21 -2.86 335 65,682 56,674 15.9%

2065 16.12 13.22 -2.90 323 68,400 59,018 15.9%

2066 16.17 13.22 -2.95 309 71,226 61,454 15.9%

2067 16.21 13.22 -2.99 295 74,178 63,996 15.9%

2068 16.26 13.23 -3.03 281 77,268 66,659 15.9%

2069 16.30 13.23 -3.07 267 80,476 69,423 15.9%

2070 16.33 13.23 -3.10 252 83,816 72,299 15.9%

2071 16.37 13.23 -3.14 237 87,294 75,296 15.9%

2072 16.41 13.24 -3.17 221 90,914 78,414 15.9%

2073 16.44 13.24 -3.21 205 94,676 81,654 15.9%

2074 16.48 13.24 -3.24 189 98,592 85,026 16.0%

2075 16.52 13.24 -3.28 172 102,67 88,538 0 16.0%

2076 16.56 13.24 -3.31 155 106,91 92,194 6 16.0%

2077 16.59 13.25 -3.35 138 111,33 95,998 3 16.0%

2078 16.63 13.25 -3.38 120 115,932 99,958 16.0%

2079 16.67 13.25 -3.42 101 120,70 104,07 7 16.0% 0

Summarized Rates: OASDI

2004 Cost Rate

Income 

Rate

Actuarial

Balance

-2078 13.65% 13.65% 0.00% 1.89%

Office of the Chief Actuary

Based on Intermediate Assumptions of the 2004 Trustees Report Social Security Administration

February 24, 2005

Change in

Actuarial

Balance

Tax all earnings except for earnings between the current-law contribution and benefit base and 

$114,900 (in 2005 with amount wage-indexed thereafter)

OASDI Taxable Payroll 

(in billions of dollars)

Increase in 

Taxable 

Payroll over 

Present Law

Expressed as a percentage of taxable payrol Trust Fund 

Ratio 

1-1-year