This document describes Phase 2 of the Fair & Simple Tax Act: a targeted modernization of Social Security designed to restore long-term solvency, improve fairness across modern careers, and close entitlement-related loopholes while preserving the core contributory structure of the program. Phase 2 is narrower in scope than Phase 1. Social Security is fundamentally sound and needs modernization and leakage prevention, not wholesale redesign.
| Press Release | Tenets | FAQs | Sources |
Part 1: The Big Picture
Part 2: Solvency Strategy
Part 3: Payroll Tax Base
Part 4: Benefit Design and Retirement Age
Part 5: Closing Payroll Leakage (MCR)
Part 6: Scope, Integration, and Open Parameters
Appendices
FOR IMMEDIATE RELEASE
Fair & Simple Tax Act, Phase 2 Modernizes Social Security to Restore Solvency and Protect the Program for Current and Future Retirees
Today, Phase 2 of the Fair & Simple Tax Act is introduced as a targeted modernization of Social Security. The proposal preserves Social Security’s earned-benefit structure while restoring long-term solvency, strengthening minimum protections for long-career low earners, and reducing payroll tax leakage at the top. For the large majority of workers, payroll taxes and benefit calculations would look the same as they do today.
The Social Security Trustees project that under current law the system faces automatic benefit reductions in 2034 when reserves are depleted.² This proposal is designed to prevent those cuts with a small number of durable, easy-to-explain reforms.
At a glance, the reform package uses five simple levers:
This is not privatization, and it is not annual means testing. It is a modernization that keeps the core insurance design intact and focuses on solvency and integrity first.
The proposal is intentionally explicit about what is structural versus what is calibration. Thresholds and phase-down rates are designed to be tunable over time without reopening the overall structure.
Radical Simplicity: The tax code should be clearly explainable and, where possible, automated. If a provision cannot be understood without specialists, it does not belong. Simplicity reduces compliance costs, economic deadweight loss, and loopholes, while enabling more meaningful public debate about tradeoffs and priorities through a smaller set of transparent levers.
Fuel the Climb (Don’t Protect the Summit): The tax and entitlement system should reward work, entrepreneurship, and families building economic security, not financial engineering or the preservation of entrenched privilege. Fairness should be evaluated over a lifetime, reflecting modern, non-linear careers. Incentives should favor productive effort and broad-based upward mobility over rent-seeking or perpetual avoidance.
Fiscal Durability: The system must be fiscally responsible across economic cycles and demographic changes. Reforms should rely on broad bases, predictable revenue, and adjustable parameters that do not require reopening the system’s core structure. A durable system reduces reliance on temporary patches, political gimmicks, and crisis-driven overhauls while prioritizing the most effective path to long-term fiscal health.
Phase 2 preserves Social Security’s core promise while addressing three structural problems under current law. The headline facts are below.
Problem in 5 numbers
These point to three concrete, well-documented structural problems under current law.
First, the program is on a clear path to long-term insolvency. Absent legislative action, combined trust fund depletion in 2034 triggers automatic benefit reductions, and the system faces a persistent 75-year shortfall.²
Second, a meaningful share of labor income at the top escapes payroll taxation entirely. High-income individuals increasingly earn through S-corporations, partnerships, and similar pass-through entities that allow labor income to be legally recharacterized as business profits or investment returns. While lawful, this systematically reduces payroll tax contributions from those with the greatest ability to pay and weakens the contributory integrity of the system. Treasury and IRS analyses suggest this leakage plausibly amounts to tens of billions of dollars per year, large enough to materially worsen long-run solvency even if precise estimates vary.³
Third, benefit scaling at very high lifetime earnings no longer serves a clear insurance purpose. Under current law, individuals with extremely high lifetime earnings continue to receive Social Security benefits that are small relative to their total retirement resources but meaningful in aggregate. While this is not a dominant cost driver, it weakens the insurance logic of the program and public confidence in its fairness. This creates space for modest, lifetime-based benefit moderation at the top without means testing or benefit cuts for typical workers.
This proposal addresses all three issues directly while protecting current retirees and preserving Social Security as a work-based social insurance program.
The changes focus on a small set of structural levers.
| What Changes | Design Tenet | Fiscal Impact |
|---|---|---|
| PAYROLL TAX BASE | ||
| Apply the full 12.4% payroll tax to all wage income by removing the taxable maximum (details in Q6) | Fiscal Durability, Radical Simplicity | Raises revenue; closes long-run gap |
| TOP-END BENEFITS | ||
| Limit benefit accrual above today’s taxable maximum using a lifetime earnings–based phase-down (details in Q7), (details in Q8) | Fiscal Durability, Fuel the Climb (Don’t Protect the Summit) | Cost control at the top; preserves insurance design |
| RETIREMENT AGE | ||
| Make a slow, capped adjustment to the Full Retirement Age for younger cohorts only (details in Q11) | Fiscal Durability | Modest savings over time |
| MINIMUM BENEFIT | ||
| Strengthen the minimum benefit for long-career low earners (details in Q10) | Fuel the Climb (Don’t Protect the Summit), Fiscal Durability | Targeted benefit increase |
| PAYROLL LEAKAGE | ||
| Apply a Market Compensation Requirement for closely held business owners to reduce income recharacterization (details in Q12) | Radical Simplicity, Fiscal Durability | Base-protecting (reduces avoidance) |
This is a modernization of Social Security, not a replacement. It keeps the earned-benefit structure intact and preserves the program’s insurance role. It relies on a few simple, durable levers rather than annual means testing or wealth taxes. The goal is a system people can understand and trust over time.
For most workers, no.
The goal is not to reduce Social Security’s role, but to make it financially durable and fairer across modern careers.
Example: A long-career, middle-income worker who has paid in steadily sees scheduled benefits unchanged. The main gain is stability: restoring solvency reduces the risk of sudden, crisis-driven cuts for workers who are counting on those benefits. It preserves the promise they have earned without changing how their benefit is calculated.
Under current law, scheduled benefits face automatic reductions in 2034 when reserves run short.² This approach prevents that outcome by using a small number of durable levers rather than repeated short-term fixes. The 75-year actuarial balance used by the Trustees is the standard test of solvency, and this package is calibrated to close nearly all of that long-range gap.
The current cap on wages subject to the Social Security payroll tax is removed.
Removing the cap reflects modern wage concentration and is one of the most effective ways to strengthen Social Security’s finances.
No.
Benefit accrual above today’s taxable maximum is explicitly limited.
This proposal separates:
This preserves Social Security’s insurance character rather than turning it into an unlimited earnings-linked annuity.
Example: A high-earning executive pays payroll tax on all wages once the cap is removed. Benefits still accrue normally up to today’s taxable maximum. Above that level, additional benefit growth is limited and can phase down for very high lifetime earners. This prevents unlimited benefit growth while strengthening solvency. The contributions are higher, but the benefit structure remains insurance-based and capped.
Instead of annual means testing, this proposal uses a lifetime earnings–based benefit phase-down.
Exact thresholds and percentages are calibration choices and intentionally left open.
Illustrative calibration (subject to adjustment)
Zero additional accrual does not eliminate benefits already earned under the existing formula.
Example: Two people earn similar totals over their careers, one with a late spike and one with steady income. The lifetime measure treats them similarly, so benefit adjustments track total lifetime earnings rather than a single high-income year.
Example: A high-earning professional pays payroll tax on all wages once the cap is removed. Benefits do not scale without limit, and additional accrual can phase down only at extremely high lifetime earnings levels, so their quality of life remains very comfortable. This is about maintaining Social Security’s insurance design and legitimacy, not punishment.
Lifetime measures are harder to game, more consistent with Social Security’s contributory design, and better aligned with modern, non-linear careers.
Annual income or wealth testing introduces complexity, administrative discretion, and political instability. This proposal avoids those pitfalls while still moderating benefits at the very top.
The proposal strengthens the minimum benefit for long-career low earners.
Illustratively:
This ensures that long participation in the workforce reliably protects against old-age poverty.
Example: A home health aide who works most years at low wages gains a more reliable floor in retirement, reflecting long participation even with modest earnings. A short-career worker does not receive the same floor.
Gradually, and only for younger cohorts. Current retirees and near-retirees are fully protected, and the change applies only to workers below a defined age at enactment (illustratively, under age 45).
We treat the retirement age as a variable, not a constant. Just as life expectancy has evolved, the system’s schedule must evolve to stay durable.
Why: Americans are living longer in retirement than prior generations. The Social Security Trustees’ period life expectancy table shows that remaining life expectancy at age 65 increased from about 15.0 years for men and 19.0 years for women in 1990 to about 18.3 and 20.9 years in 2024.⁴ Meanwhile, the average retirement age in the U.S. is already in the mid-60s for men and the low-60s for women.⁵ A very slow FRA adjustment reflects these realities and improves long-run solvency without shocks.
How (illustrative mechanics):
Example: If enacted in 2026, a 50-year-old sees no change. A 30-year-old sees a small, predictable increase over time, measured in months, not years. The total increase is capped so the adjustment cannot expand indefinitely.
This proposal uses a Universal Market Compensation Requirement (MCR) to protect Social Security’s contributory base.
High earners can currently avoid payroll taxes by recharacterizing labor income as S-corp distributions, partnership profits, or carried interest. The MCR addresses this directly.
The MCR is a single, mechanical rule that ensures a baseline amount of income is treated as labor income for Social Security purposes when individuals control or manage closely held businesses. The Minimum Contribution Rule replaces today’s subjective reasonable compensation enforcement with a single mechanical rule that is simpler to administer and harder to game.
To maintain Radical Simplicity, the MCR uses a single, mechanical formula applied to each tax year. It requires no complex valuations or multi-year smoothing.
MCR = max(A, B)
A) The Safe Harbor Floor: $75,000 (Single) / $150,000 (Married).
B) The Entrepreneur’s Split: 35% of current-year net business profit.
Why 35%? The FSTA recognizes that entrepreneurs contribute both labor and at-risk capital. We define 35% of profit as a market labor share (subject to payroll tax) and the remaining 65% as a return on risk (not subject to payroll tax).
Solo Practitioner Example: A freelancer makes $100k in profit. The Floor ($75k) is higher than 35% of profit ($35k), so they pay payroll tax on $75k. This ensures everyone contributes a baseline to the safety net.
Successful Firm Example: A partner in a law firm makes $1M in profit. The Entrepreneur’s Split ($350k) is higher than the floor, so they pay payroll tax on $350k. The remaining $650k keeps its normal tax character and is not subject to payroll tax.
Income up to the MCR is treated as labor income, subject to payroll taxes, and counts toward Social Security benefits (subject to high-earner phase-down). Income above the MCR retains its assigned tax character, and because the rule is mechanical rather than discretionary it avoids case-by-case disputes.
The rule applies consistently to S-corp owners, professional partnerships, and carried interest.
No.
Social Security remains a labor-based insurance system. Capital gains do not count toward contributions or benefits and are addressed through the tax system in Phase 1.
This proposal does not reduce payroll tax rates or create special carve-outs. Relief for low-income workers comes through lower income tax rates at the bottom and a stronger Social Security minimum benefit.
The two phases are designed together:
Rates and thresholds can be calibrated jointly over time.
This proposal fixes structure first, not final numbers.
Open calibration questions include:
Private accounts have appeal: investment growth and personal ownership. But the central problem is transition financing: promised benefits to current retirees and near-retirees still must be paid, and diverting payroll taxes to private accounts creates a large funding gap that must be filled by higher taxes, borrowing, or benefit cuts.⁶
Private accounts also add market and timing risk near retirement, while Social Security provides inflation-protected lifetime income plus survivor and disability protection. Managing millions of small accounts adds administrative costs and complexity compared with a centralized system.⁷
Social Security is largely pay-as-you-go, so demographics and wage concentration matter, but that is different from a pyramid scheme because it is a transparent, legislated social insurance system. Even after trust fund depletion, benefits do not drop to zero; payments continue at the level supported by incoming revenue.⁶
Public support for protecting benefits is strong, which makes durable solvency fixes more credible than privatization.⁸
This proposal fixes solvency and integrity while keeping the simple, durable insurance core.
The estimates below use SSA OACT 2025 option impacts as proxies for Phase 2 levers. Values are shown as long-range actuarial balance improvements (percent of taxable payroll). These figures are illustrative and are not additive.⁹
| Metric | Value |
|---|---|
| Long-range actuarial shortfall | 3.82% of taxable payroll⁹ |
| 75th-year annual deficit | 4.84% of taxable payroll⁹ |
| Change | Long-range actuarial balance | Share of shortfall | Notes |
|---|---|---|---|
| Strengthen minimum benefit to ~125% of poverty for long-career low earners | -0.10% | -3% | SSA OACT proxy: B5.2⁹ |
| Change | Long-range actuarial balance | Share of shortfall | Notes |
|---|---|---|---|
| Remove taxable maximum with partial benefit credit | +2.21% | 58% | SSA OACT proxy: E2.11⁰ |
| High-earner benefit phase-down | +1.11% | 29% | SSA OACT proxy: B1.4 (progressive price indexing at 50th percentile)⁹ |
| Gradual FRA adjustment (1 month every 2 years to 68) | +0.45% | 12% | SSA OACT proxy: C1.1⁹ |
| Market Compensation Requirement (MCR) | Not scored | — | No official estimate available |
IRS estimates the employment tax gap at $127B for tax year 2022. A portion of that gap is attributable to income recharacterization and payroll leakage that the MCR is designed to reduce.¹¹
| Scenario | Costs | Gains | Net Improvement | Share of 3.82% Gap |
|---|---|---|---|---|
| Illustrative (additive, excludes interactions and MCR) | -0.10% | +3.77% | +3.67% | ~96% |
Rule of thumb: 1% of taxable payroll ≈ $85–95B per year (using recent taxable payroll on the order of $8.5–9.5T). On that basis, the illustrative +3.67% improvement equates to roughly $310–350B per year in steady‑state savings. Final totals depend on calibration and interactions.
These case studies show simplified before/after impacts for representative taxpayers. Figures are illustrative and rounded; they focus on OASDI and do not include Medicare taxes.
The MCR applies to owner‑operators of closely held businesses and pass‑throughs. It uses reported wages and business profits to set a minimum payroll‑tax wage base, preventing income recharacterization from eroding Social Security contributions. The rule preserves entrepreneurship by allowing a portion of profit to remain outside payroll tax while ensuring a baseline contribution that protects the system’s financing and fairness.
| Case Study | Current Law | FSTA | Change |
|---|---|---|---|
| Long-Career Home Aide | ~$1,100/mo benefit | ~$1,560/mo benefit | +$460/mo |
| Low-Income Consultant | $6,200 OASDI tax | $9,300 OASDI tax | +$3,100 |
| Mid-Income S-Corp Consultant | $12,400 OASDI tax | $21,700 OASDI tax | +$9,300 |
| High-Income S-Corp Owner | $18,600 OASDI tax | $43,400 OASDI tax | +$24,800 |
| Typical W‑2 Worker | $9,920 OASDI tax | $9,920 OASDI tax | $0 |
| Top 0.1% Executive | ~$21k OASDI tax | $248k OASDI tax | +$227k |
Pattern:
Assumes 30+ years of covered earnings at low wages. Illustrative Federal Poverty Level (FPL) for a single adult is set at $15,000 (rounded). Phase 2 floors the minimum benefit at 125% of FPL.
Rule applied: Minimum benefit floor at 125% of FPL for long‑career low earners.
| Current Law | FSTA | Change | |
|---|---|---|---|
| Annual Benefit | $13,200 | $18,750 | +$5,550 |
| Monthly Benefit | $1,100 | $1,560 | +$460 |
| Benefit Level | ~88% of FPL | 125% of FPL | +37 pts |
Why: The minimum benefit guarantees that a long-career low earner does not retire into poverty, while keeping the contributory structure intact.
Assumes $90,000 in annual profit and a $50,000 salary under current law.
Rule applied: MCR sets payroll‑tax wages to max($75k, 35% of profit).
| Current Law | FSTA | Change | |
|---|---|---|---|
| OASDI Tax Base | $50,000 | $75,000 | +$25,000 |
| OASDI Payroll Tax (12.4%) | $6,200 | $9,300 | +$3,100 |
Intentional impact: Contributions rise to meet the baseline floor, broadening the base for system durability.
Why: The floor ensures a baseline contribution even when reported wages are low.
Assumes $500,000 in annual earnings and a $100,000 salary under current law.
Rule applied: MCR sets payroll‑tax wages to max($75k, 35% of profit).
| Current Law | FSTA | Change | |
|---|---|---|---|
| OASDI Tax Base | $100,000 | $175,000 | +$75,000 |
| OASDI Payroll Tax (12.4%) | $12,400 | $21,700 | +$9,300 |
Intentional impact: Contributions rise to align payroll taxes with a market‑labor share of profit and reduce avoidance.
Why: The MCR aligns payroll contributions with market‑rate compensation and reduces the advantage of recharacterizing labor income as profit.
Assumes $1,000,000 in annual profit and a $150,000 salary under current law.
Rule applied: MCR sets payroll‑tax wages to max($75k, 35% of profit).
| Current Law | FSTA | Change | |
|---|---|---|---|
| OASDI Tax Base | $150,000 | $350,000 | +$200,000 |
| OASDI Payroll Tax (12.4%) | $18,600 | $43,400 | +$24,800 |
Intentional impact: Contributions scale with business size while preserving a return‑on‑risk share outside payroll tax.
Why: The split scales contributions with business scale without requiring a subjective “reasonable salary” test.
Assumes $80,000 in wage income (below the taxable maximum). Under current law and FSTA, the same OASDI tax applies and the benefit formula is unchanged.
Rule applied: Wages below the taxable maximum are unaffected by cap removal.
| Current Law | FSTA | Change | |
|---|---|---|---|
| OASDI Tax Base | $80,000 | $80,000 | $0 |
| OASDI Payroll Tax (12.4%) | $9,920 | $9,920 | $0 |
Why: The cap removal only affects wages above the taxable maximum. For typical W‑2 workers below the cap, payroll taxes and benefits remain the same.
Assumes $2,000,000 in wage income. Current law applies OASDI tax only up to the taxable maximum (illustratively $170,000).
Rule applied: The taxable maximum is removed and benefit accrual phases down at very high lifetime earnings.
| Current Law | FSTA | Change | |
|---|---|---|---|
| OASDI Tax Base | $170,000 | $2,000,000 | +$1,830,000 |
| OASDI Payroll Tax (12.4%) | $21,080 | $248,000 | +$226,920 |
Intentional impact: Contributions rise because the taxable maximum is removed. Benefit accrual above today’s cap phases down at very high lifetime earnings, preserving the insurance design while strengthening solvency.