Eliminating the Taxable Maximum: An Easy Fix for Social Security? You decide.

During the early months of every year, Social Security solvency conversations frequently single out the provision that exempts wages above a limit—referred to as the taxable maximum—from the FICA/SECA tax assessment. That assessment alone provides more than 90% of the program’s revenue, so it’s a big target area in the search for revenue increases to stave off Social Security’s looming insolvency.

Whether to eliminate the taxable maximum or adjust it to draw more earnings into the FICA/SECA tax calculation can be an emotional issue in the ongoing Social Security funding debate.  In many of the arguments, the taxation limit separates high earners from the rest of us, since only about 6% of the wage-earning population is affected. Consequently, rhetoric around pursuing a change in the taxable maximum tends to drift into the “why not just tax the rich?”, with the assumption that those with incomes exceeding the limit are “rich.”

It’s a sticky issue, to be sure, and there are many viewpoints regarding what could and should be done, as well as many implications in the options associated with any change in application of the taxable maximum.

Some History on the Matter

Since many of the arguments stress the “unfairness” of some earnings escaping the tax, a quick look at why the taxable maximum was included in Social Security way back in 1935. According to historical research documents, Congress sought to reinforce the original intent of Social Security, which was to provide a “basic, government-guaranteed source of income for retirees.” In the context of “basic,” Congress set an upper limit on the amount of this benefit, and, since another original intent was to relate benefits to the amount contributed via payroll taxes, it was deemed appropriate that the amount of taxation would be similarly capped.

The original taxable maximum^[1} was set at $3,000 and remained at that level until 1951. The Social Security Act Amendments of 1950 raised it to $3,600, and it was adjusted incrementally on an ad hoc basis for the next 20 years, reaching $7,800 in 1971. The 1972 Social Security Amendments raised the maximum in each of the next three years (to $9,000 in 1972, $10,800 in 1973, and $12,000 in 1974).  

From 1975 forward, the taxable maximum increased automatically based on the national average wage index (NAWI), although 1979, 1980, and 1981 saw ad hoc adjustments above the NAWI specifically done to correct a benefit calculation flaw discovered following the 1972 Amendments, and by 1981 had reached $29,700. Since then, the limit has grown in sync with NAWI, reaching the 2026 level of $184,500.

Adjusting for inflation, the $3,000 original taxable maximum would have grown to about $72,000 in 2026. Based on the ad hoc increases over the years, coupled with the NAWI increase since 1975, the 2026 taxable maximum is about two and a half times the original limit. Consequently, the adjustments implemented over more than nine decades have, in fact, increased the pro rata revenue contribution attributable to FICA/SECA taxes paid by high earners.

Arguments For Eliminating the Taxable Maximum

Those in favor of removing the taxable maximum first point out that taxing all wages would increase program revenue, thereby extending Social Security’s ability to pay full benefits further into the future than currently projected. How far into the future depends on whether the additional taxes paid by higher earners are included in the benefit calculations, but some estimates point to a 30- to 40-year solvency reprieve.

From a tax policy standpoint, supporters for elimination cite the current tax’s regressivity, in that it places a higher tax burden, in percentage terms, on lower earners. Complete elimination of the limit would make Social Security more progressive, as is the case in the actual benefit calculation.

Another key point in support of eliminating the taxable maximum is the issue of income inequality. An assumption in the 1983 Social Security Amendments was that 90% of the total workforce payroll would be subject to FICA/SECA taxes, but statistics show that this percentage has dropped to about 82.5%, since wages paid to workers above the taxable maximum have increased substantially more than for the 94% below that level.

Some argue that removing the cap would be consistent with the step taken in 1993 to subject all earnings to the Medicare portion of FICA/SECA, while others point to Social Security’s “collective responsibility,” meaning all workforce participants share equally the obligations associated with the program’s social insurance mission.

Arguments Against Eliminating the Taxable Maximum

A fundamental argument here is that the current program structure ensures a relationship between earnings and benefits, notwithstanding the formulas’ progressive nature. Benefits are capped, just like the tax contributions. If the cap were removed and all wages were taxed, much of the revenue gain would be lost because of the resulting very high benefits paid to high earners (an issue already being cited in some quarters as warranting correction via benefit caps). Further, if the additional tax paid by high earners is not included in the benefit calculation, Social Security’s progressive design would be magnified, making it appear more like a welfare program.

Then there’s the tax-rate argument: adding 12.4% to the tax burden already shouldered by high earners would likely push the top marginal tax rate for this demographic above 50% (remember that some states still treat Social Security benefits as taxable income). Economists typically equate this level of taxation with a diminished work incentive, a stifling of innovation, and a blockage of investment.

Another argument is that the additional tax burden would, in effect, limit future funding options for programs in need (think Medicare). With an already excessive tax burden, the “tax the rich” approach would be significantly narrowed. Further, with a current cap of $184,500, many workers who exceed this level are barely above middle class and not necessarily “rich.” The additional tax burden could also cause these taxpayers to limit their savings or reduce charitable contributions, with both developments negatively affecting the overall economy.

One philosophical effect of eliminating the taxable earnings limit is a potential reduction in work-related career development incentives, coupled with the likely motivation for employers to shift payroll contributions toward more untaxed benefits, and the resulting decrease in Social Security tax revenue.

In terms of the overall impact on Social Security’s long-term funding shortfall, total elimination of the taxable maximum would not represent a complete solution. Some estimates suggest this would push the full depletion of the trust fund back to about 2060, only about a third of the usual 75-year projection period. This is another kicking of the can down the road…although to be fair, 28 years is a fairly long kick.

So, How About a Compromise?

It’s clear that the battle lines are drawn on this issue, and Congress can expect to receive strong recommendations from a variety of sources on both sides. What may develop from the negotiations on a solvency solution is a middle ground that recognizes both positions. For example, the Bipartisan Policy Center has advanced a proposal to, instead of immediately eliminating the taxable maximum, implement a series of increases to advance the limit to the level targeted in the 1983 amendments (90%), and then index it to the NAWI to maintain that level of covered earnings. For example, adding 2% to the annual taxable maximum adjustment would, over a 38-year period, raise the taxable maximum ($176,100 in 2025) to $740,851 by 2064, eliminating an estimated 22% of the long-range actuarial balance shortfall.    

AMAC’s Social Security Guarantee supports this approach and suggests including the additional earnings in the benefit calculation to maintain at least some connection between earnings and eventual benefits, perhaps applying a lower bend point to the additional taxed income.

This compromise, in conjunction with other program adjustments outlined in AMAC’s plan, would help resolve Social Security’s long-term funding shortfall and avoid near-term benefit reductions.

[1] https://www.ssa.gov/policy/docs/policybriefs/pb2011-02.html