Key Points
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Social Security is primarily funded by payroll taxes.
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There’s a limit as to how much income the program taxes each year.
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Social Security’s wage cap is likely to rise in 2027, and some workers could feel the pain.
At this point, a lot of older Americans are eager to know how much their Social Security benefits will increase in 2027. And they shouldn’t have to wait much longer, since an official Social Security cost-of-living adjustment (COLA) should be revealed in less than a month.
But that’s not the only change coming to Social Security in 2027. There’s another change brewing that could impact higher earners, and it’s an important one to gear up for.
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Higher earners should prepare to pay more into Social Security
Social Security gets most of its revenue from payroll taxes. Workers and employers share the burden of a 12.4% tax rate, split evenly, on up to a certain amount of earnings that changes every year. That amount is known as Social Security’s wage cap.
This year, Social Security’s wage cap is $184,500, so earnings beyond that threshold aren’t taxed to fund the program. But the wage cap tends to increase yearly in line with wage gains. So come 2027, higher earners could end up paying Social Security taxes on a larger portion of their paychecks.
Of course, for many workers, a higher wage cap is a non-event. That’s because the median weekly U.S. wage is $1,251, which translates to about $65,000 in annual earnings if we assume 52 weeks of pay.
Since the current wage cap is almost triple that amount, it’s fair to say that a higher cap in 2027 won’t impact most working Americans. Many, in fact, may not even be aware that a wage cap exists.
Social Security’s wage cap is a source of contention
Of course, some lawmakers aren’t happy about the fact that Social Security has a wage cap at all. Their argument is that the rich shouldn’t get out of paying taxes on what could be a large portion of their earnings. But the flipside of Social Security’s wage cap is the program’s maximum monthly benefit.
Social Security calculates retirement benefits based on earnings. And wages beyond the annual cap don’t count toward benefit calculations. So while higher earners don’t always have to pay Social Security taxes on all of their wages, they’re capped in how much they can collect each month in retirement.
It’s too soon to know exactly how much Social Security’s wage cap will increase in 2027. But higher earners should be on the lookout for an announcement in mid-October and take the opportunity to plan accordingly. That could mean increasing pre-tax retirement plan contributions or taking other steps to offset a larger Social Security tax bill.
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