Why is there a cap on social security taxes?

[Chuuku Davis]

What was the original thought and why has it continued?

[gateley]

1. I can only surmise it's the same "protection" afforded the wealthy

as the other tax tricks. Because the Congress allowed themselves to be influenced.

Welcome to DU, Chuuku Davis!

[indepat]

5. Social security is three-tiered and those in the highest-earning tier subsidize the lower tiers.

Aint no way the Congress will allow taxpayers earning more than the present cap to also subsidize the lower-tier earners. To wit: it's okay-doa-ky for those with incomes in the higher range below the cap to subsidize the lower-earning tier wage earners, but it would be some leftist pinko socialist commie blasphemy to require those with incomes above the present cap to also subsidize the lower-tier earner. See, everything is so simple when viewing the world through the oh-so warped right-wing prism.

[tammywammy]

2. There's a cap on the benefit amount too.

So the thinking is that if you removed the cap and applied it to all income, then the higher earners would receive a higher benefit monthly payment later. Cap the amount that is taxed and you can cap the total monthly benefit amount as well. Also removing the cap and still capping the monthly benefit is thought to make Social Security a "welfare" program which would eventually result in its demise.

[PDJane]

3. Because the amount social security pays is limited; after a certain amount, you can't be insured.

It's similar in Canada. However, removing the cap and spreading the wealth would mean that the situation would remain solvent forever. There is an alternative to means testing, too; if you have to claim social security as income on your income tax forms, it could be taxed away from those who don't need it.

[Yo_Mama]

4. Because there's a cap on benefits

Actually the program is structured to give more weight to earnings on the lower end. The amount you "earn" in terms of benefit for the last level is only 15%.

But if the cap were unlimited, some people would end up getting massive Social Security checks each month. That would be a huge future liability. This SSA pub shows how benefits are calculated:
http://www.ssa.gov/pubs/media/pdf/EN-05-10070.pdf

You get 90% of your first $791 in average monthly earnings. Between $791 and $4,798 you get 32%. After that, it's 15%.

But even so, when you average earnings with some very high years it really brings the benefit amount up rapidly.

If you left the formula the way it is now and just charged Social Security tax, then this would really be an income tax. People would be paying taxes and get absolutely no return.

If you charged tax on all wages and expanded the formula to have no limit on wages, then you'd be racking up future SS deficits.

[reteachinwi]

6. There was a concern that the benefits be considered earned

by low income workers, and were not an "entitlement" like welfare or food assistance.

By contributing through similar deductions to an old-age insurance system, the individual worker would establish an earned right to a benefit related to the contribution made.

The annuity program was primarily designed for persons in lower-income groups. It was, therefore, recommended that nonmanual workers earning in excess of $250 a month be exempted from the taxes, and in consequence excluded from the benefits recommended.

The recommendation that nonmanual workers earning in excess of $250 per month be exempted from the tax was not adopted. Under the Social Security Act the remuneration of manual and nonmanual workers in excess of $3,000 a year from any one employer will not be subject to the tax. In this manner all employees and their employers regardless of wage level will pay taxes with respect to the first $3,000 of annual wages.

http://www.socialsecurity.gov/history/reports/ces/cesbookc10.html

Since the program was designed to benefit low income workers, the level of income subject to the tax was capped.