Why Lifting the Social Security Tax Cap Won’t Solve the Problem: My Exchange with a Curious Reader
Every so often, I receive a reader’s email that’s too thoughtful not to share. Recently, one reader posed such a question: What if we simply tax high earners on all their income instead of capping Social Security taxes at $176,200? Wouldn’t that go a long way toward fixing the trust fund? Below is the core of our exchange on this issue, slightly edited for clarity and flow, followed by a breakdown of the policy tradeoffs.
Reader’s Question:
“If there was a policy of taxing all those well-to-do folks on every cent of income, rather than the current cap of $176k, would that go quite a way towards adding decades to the [Social Security] trust fund’s solvency?
I’m quite annoyed by billionaires calling Social Security a Ponzi scheme while not paying into it beyond the cap. That seems more like a Ponzi scheme to me. You'll probably disagree, but for many people, Social Security is the only stable retirement income that isn't at the mercy of market volatility. I also think the people who helped create that wealth—customers and employees—deserve some security in return.”
My Response:
You raise a very good question. Social Security is indeed a vital lifeline for millions of older Americans. One in four Americans over 65 rely on Social Security for 90% of their income. It is a critical, if imperfect, form of income protection. But when it comes to solving Social Security’s looming funding gap, removing the income cap on FICA taxes is only a partial fix, and one that comes with serious tradeoffs.
Let’s look at the numbers:
The Social Security shortfall is projected to be 1.8% of GDP on a permanent basis.
Eliminating the tax cap without increasing the benefits paid to high earners would raise about 0.9% of GDP.
In short: you’d solve about half the problem.
Even with this bold policy change, the system would return to a deficit within just 5 years.
And this only works if we break the link between what people pay into the system and what they get out of it. That’s a major shift in the nature of Social Security from a contributory program to something more like a welfare benefit. If we lift the tax cap but not the benefit cap, we’re asking top earners to subsidize the system without receiving additional benefits. That change in design would be both politically and philosophically contentious.
Why It’s Not So Simple
Removing the cap would also raise marginal tax rates for top earners. Consider a high earner in California:
37% federal income tax
12.3% state income tax
7.65% FICA
0.9% Additional Medicare Tax
3.8% Net Investment Income Tax
That’s over 60% in combined marginal taxes—well beyond the revenue-maximizing threshold suggested by the empirical literature. Push beyond that and you risk diminishing returns, economic distortions, or even lost revenue.
And don’t forget: Medicare’s funding problem is twice as large as Social Security’s. If we soak the rich to fill the Social Security hole, we may not have room to fix the larger problem that’s coming next.
You make another point: many people succeed thanks to the work of others. That is fair to say, but it’s also worth remembering that the U.S. already has one of the most progressive tax systems in the world:
The top 10% pay 72% of all federal income taxes. The bottom 50% pay just 3%. Once you factor in tax credits, many low-income households have a net negative tax rate.
Success already comes with significant fiscal sacrifice. If that sacrifice starts to feel like punishment, it risks undermining the very innovation and entrepreneurship that generate the tax base we rely on.
The Long-Term Picture
Even as the Boomer population declines, which, as you note, will happen in the coming years, the math doesn’t change. In the 1950s, there were 8 or 9 workers per retiree. Today there are fewer than 3. Within decades, as the chart below shows, it will be around 2. A system where 1 current retiree is funded by the taxes of 2 workers is not sustainable.

So yes, removing the cap buys us time, but not much. Eventually, we’ll need to:
Cut benefits, raise the retirement age, increase taxes on the middle class, or a combination of these options. If we do nothing, these decisions will be made for us in crisis mode.
A Call for Real Reform
Your question is rooted in a strong sense of fairness, and that’s something I deeply respect. But fairness has to be balanced with economic reality. While the Social Security system isn’t a Ponzi scheme, it is a math problem. And if we’re serious about fixing it, we need to go beyond half measures and take a long-term, structural view of reform.
In the past, I have written about bipartisan reforms to improve trust fund solvency. My colleague Charles Blahous recently offered reform ideas, including changes to benefit formulas, moderating benefit growth, and better targeted spending. My colleague Veronique de Rugy has suggested that absent major reform, benefits could be distributed on a needs basis, with the half of retirees who depend on benefits being fully covered and the benefits of higher earners being distributed on a progressive basis.
Thanks to you for your thoughtful engagement. If more policy discussions started with this kind of earnest curiosity, we’d be in a much better place.