A: Because there is a maximum amount of Social Security benefits that can be received, the thinking has been that there should be a maximum annual contribution. For those currently receiving Social Security benefits, this has been a good deal-- most are getting more out than they paid in. When the progressive taxation of Social Security benefits under the federal personal income tax is accounted for, low- and middle-income recipients are doing the best under the current regime.

Whether capped funding is a good deal for any individual depends on the level of the cap and the amount of benefits. These may well change as adjustments are made in the program to make it solvent in the next century.

Even if Social Security works out for most people despite the cap, the tax would clearly be less regressive if uncapped. In fact, if the tax was uncapped, the total rate could be lowered from 12.4% to 10.9%. Or, if the cap were removed and the rate kept the same, the tax would raise $52.8 billion more in annual revenue. Despite these benefits, some usual supporters of progressive taxation oppose removing the cap on the grounds that it would undermine political support for Social Security. Of course, having a lower rate on middle-income taxpayers might increase political support. Note that the Medicare tax (total rate of 2.9%) is not subject to a cap.

Last Updated 11/26/2000

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