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.”
Background
A 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 1985
Earnings Level | Money’s Worth Ratio-Single Male | Money’s Worth Ratio-Single Female |
Scaled Very Low ($15,861) | 2.20 | 2.81 |
Scaled Low ($28,549) | 1.66 | 1.94 |
Scaled Medium ($63,443) | 1.17 | 1.33 |
Scaled High ($101,509) | 0.97 | 1.09 |
Maximum Earner ($156,927) | 0.76 | 0.83 |
Source: 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 Cap
Perceived 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 Cap
Perceived 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.
Summary
Social 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.
