Social Security – Keep the Wage Cap

There are many ideas swirling around about how to “fix” Social Security. Eliminating the wage cap is one often talked about. In our opinion this is a horrible idea. It’s just another one of those stick it to the “wealthy” plans. Sticking it to the “wealthy” never seems to us to be a very fair way to treat our fellow citizens, but as in all these “tax the rich” schemes, the truly wealthy are never touched.


The rich derive their wealth and incomes from sources other than wages – property, stock and bond investments – sources of income not taxed under Social Security. People that have high incomes from wages, often for a brief period in their lives, are the ones that pay the penalty under these “tax the rich” programs.


Social Security produces a lousy return on investment for many American workers as it is now. Eliminating the wage cap will not improve the program’s long term sustainability, but will certainly hurt the individual trying to save their own money for retirement, not to mention the potential negative repercussions to the economy.


Read Bruce Bartlett‘s The Stealth Tax. Excerpts below.

Since the Social Security system was created, the payroll tax has applied only to a portion of total wages. Originally, the limit was $3,000, which Congress raised from time to time. Since 1972, the wage base has been indexed and rises automatically each year. This year, it was $87,900. Starting on Jan. 1, the taxable wage base will rise to $90,000.

As it is, there is already an increasingly tenuous relationship between [Social Security] taxes paid and benefits received by workers with incomes equal to or greater than the taxable base. According to the Congressional Research Service, in 1980 a retiree with lifetime earnings at or above the Social Security wage cap got back all of his and his employer's contributions in 3.1 years. By 2000, it took 24.9 years, and by 2010 it will take 35.3 years. Under current projections, a worker retiring in 2030 will need 55 years worth of benefits to get back all his contributions.

If the cap is removed and benefits are limited to current levels, the return for workers taxed at the maximum will become nonexistent. This means that Social Security will no longer be a pension system to which one earns benefits, but will instead be nothing but a welfare program.

Of course, another consequence of raising the cap is that it will constitute a massive marginal tax rate increase. The top rate on wages will, in effect, rise by 12.4 percent, raising the de facto top rate from 38 percent to more than 50 percent (including the 2.9 percent Medicare tax, which has applied to all wages since 1993).

Even if benefits are frozen, the revenue gain from lifting the wage cap isn't that great. According to Matt Moore of the National Center for Policy Analysis, it would only increase the life of the Social Security trust fund by seven years.