Eliminating the Cap on Social Security’s Taxable Wage Base

In
2025, the maximum taxable wage for determining payroll tax (FICA tax)
contributions to Social Security (OASDI) is $176,100. This is also the
maximum taxable wage for 2025 for determining an individual’s lifetime
benefit (primary insurance amount) payable from the system. Under
current law, the “cap” is adjusted annually based on the increase in the
national average wage index.Eliminating the cap is perhaps the
most popular solution suggested these days for solving most of the
system’s short and long-term funding problems. Since it only affects
relatively wealthy working Americans, it is a solution that tends to
have wide support among lower-paid workers and retirees, consistent with
the famous Russell B. Long quote from 1973, “Don’t tax you, don’t tax
me, tax the fellow behind the tree.” In this post, we will take a quick
look at the pros and cons of eliminating the cap on Social Security’s
taxable wage base.For more of my thoughts on the causes of the
system’s funded status deterioration since 1983 and lessons for system
reform, readers can read my Advisor Perspectives article, “Social Security’s Deterioration and Implications for Future Reform.”BackgroundA
1936 publication of the Social Security Board entitled, “Security in
Your Old Age” contained the following description of the financing of
the system:“…beginning in 1949, twelve years from now, you and
your employer will each pay 3 cents on each dollar you earn, up to
$3,000 a year. That is the most you will ever pay.”Since issuance
of that publication, the system’s tax rate has been increased on
several occasion to its current level of 6.2% for employers and
employees (and 12.4% for those who are self-employed), and the maximum
annual taxable wage base has been increased from $3,000 in 1949 to
$176,100 in 2025.Notwithstanding these increases, the system now
finds itself with a long-range actuarial deficit, measured over the next
75 years of 3.82% of taxable payroll and a short-term funding problem
because system trust fund assets are projected to be depleted in 2033
(or 2034 if the OASI and DI funds are merged together). In addition,
this 75-year long-range actuarial deficit is expected to increase from
year to year after 2025 as deficits projected for years after the end of
the current 75-year projection period are gradually recognized in
future years’ 75-year actuarial valuations (Valuation Date Creep).From
its inception, the system has been a popular program with U.S.
stakeholders because it does a reasonably good job of balancing social
adequacy elements with individual equity elements. Social adequacy is
measured by the system’s ability to keep retirees out of poverty and by
providing higher income replacement rates for workers with lower career
average earnings.Individual equity for the system is generally
measured by dividing the present value of an individual’s accumulated
contributions by the present value of his or her expected benefits. This
calculation is referred to as a “money’s worth” ratio. The most recent
money’s worth calculations were contained in Social
Security Administration’s Actuarial Note Number 2024.7—Money’s Worth
Ratios Under the OASDI Program for Hypothetical Workers. These
ratios vary by earnings level, scenarios for future reform, type of
retirement, adjustments for mortality and disability and year of birth,
and are based on assumptions used to measure the program’s actuarial
status (and retirement at age 65). The following table shows results
from Table 1A for hypothetical single males and single females born in
1985 assuming continuation of the current scheduled benefits and have
been adjusted for different mortality and disability experience.Money’s Worth Ratios by Earnings Level—Hypothetical Single Males and Single Females Born in 1985Earnings LevelMoney’s Worth Ratio-Single MaleMoney’s Worth Ratio-Single FemaleScaled Very Low ($15,861)2.202.81Scaled Low ($28,549)1.661.94Scaled Medium ($63,443)1.171.33Scaled High ($101,509)0.971.09Maximum Earner ($156,927)0.760.83Source:
Table 1A—Current Law Scheduled Scenario with Mortality and Disability
Adjustments, SSA Actuarial Note Number 2024.7, “Money’s Worth Ratios
Under the OASDI Program for Hypothetical Workers.” Figures in
parenthesis represent hypothetical career average earnings wage indexed
to 2022. This table shows that under assumptions used to measure
the system’s annual funded status and assuming continuation of scheduled
benefits and taxes (i.e., no future reductions in benefits or taxes),
most taxpayers born in 1985 could expect to get their money’s worth from
the taxes they expect pay to Social Security. Consistent with the
elements of social adequacy built into the system, lower paid workers
are projected to have higher money’s-worth ratios than higher paid
workers. Under these assumptions, maximum career earners born in 1985
can expect to receive system benefits of about 80% of the value of their
accumulated taxes.Since Social Security is a defined benefit
type plan, higher levels of benefits can be provided to workers with
relatively lower levels of earnings simply by changing the benefit
formula. Generally, this same result is much harder to achieve in a
defined contribution type of plan, where typically, everyone receives
the same contribution level measured as a percentage of earnings. Pros of Eliminating the CapPerceived fairness.
Advocates of eliminating the cap argue that if I have to contribute
12.4% of my earnings, then it is only fair that someone who earns more
than the cap should also be required to contribute 12. 4% of their total
earnings.Increased Revenue and Improved Solvency.
Eliminating the cap would provide much needed increased revenue and
would significantly improve the system’s long-term solvency. Item E2.1
of the Summary of Provisions That Would Change the Social Security Program,
Social Security actuaries estimate that eliminating the cap, applying
the full 12.4% tax rate to all earnings and not adjusting the maximum
benefit calculation would increase the 75-year long-range actuarial
balance by 2.55% of payroll if enacted immediately. It would be expected
to eliminate over half of the shortfall projected for the 75th year of the 75-year projection period. It would not, however, meet the requirements for long-term sustainable solvency.The
Social Security summary also determines the financial impact of many
other options for adjusting the cap in Section E. For example, items
E.3.1 and E.3.2 show the impact of increasing the cap so that 90% of US
earnings would once again be subject to the payroll tax (supposedly the
target when the law regarding the cap was last changed according to NASI
as discussed in our post of June 28, 2025). Enactment of this change
would only increase the 75-year actuarial balance by about 1% of
payroll, not anywhere near enough to bring the system back into
long-range actuarial balance, let alone into “sustainable solvency.”Reduce Inequality/Increase Progressivity.
Many people believe that despite the current progressivity of income
taxes and the money’s worth ratios favoring lower paid workers, Social
Security and perhaps other federal programs should be made more
progressive.Cons of Eliminating the CapPerceived fairness.
Under current law, it can be argued that the Social Security benefits
one receives are reasonably closely tied to one’s contributions to the
system. Higher paid workers who contribute more receive higher benefits.
If benefits are capped at a maximum level, then it is fair that taxes
should also be capped. As a society, we don’t charge people who buy the
same automobile a higher price simply because they make more money. Effect on Money’s Worth Ratios.
An individual who earns five times the current law maximum would
ultimately have a money’s worth ratio of about 0.16 (0.8 / 5) if the cap
were eliminated and no benefit is provided for the increased
contributions.Less Support for the System. Eliminating
the cap would obliterate the link between contributions and benefits for
highly compensated workers. Therefore, it would not be difficult to
imagine that long-enjoyed-system support would be seriously damaged over
a very short period of time.SummarySocial
Security faces serious short-term and long-term funding problems. A
popular solution to its problems appears to be “Let’s just soak the
working rich. They can afford it.” Rather than rely on a relatively
small group of taxpayers to try to bail us out, however, I favor a more
robust solution where each party who can afford to makes reasonable
sacrifices for a sustainable program. I believe I’ve outlined the
framework for just such an approach in my Advisor Perspectives article.