Eliminating the Social Security tax cap would only affect 6% of earners – is it the fix we need?

You may have read that Social Security is at risk of having to cut benefits in the near future. And there’s a reason for that.

Social Security is facing a financial shortfall in the coming years as baby boomers retire in large numbers. That’s because Social Security gets most of its funding from payroll taxes. But if there are fewer workers, that revenue stream will shrink.

Compounding the issue is that as baby boomers retire, they’ll also inevitably start claiming benefits themselves. That’s apt to put a strain on Social Security’s limited financial resources, paving the way to potential benefit cuts.

Lawmakers don’t want to see those cuts happen, though, as they could potentially fuel a widespread senior poverty crisis. So they’ve been tasked with coming up with solutions to prevent Social Security cuts.

One idea is to get rid of the wage cap for Social Security tax purposes. But that solution may not be effective as one might think.

How the Social Security wage cap works

As mentioned above, Social Security is primarily funded by payroll taxes. But workers don’t automatically pay those taxes on every dollar they make.

Each year, there’s a wage cap established that determines how much income is taxed to fund Social Security. This year, that cap is $176,100. It’s likely to keep rising over time.  

Some say that lifting the wage cap is a great way to pump more money into Social Security. But it’s not that simple.

A limited impact — and questions raised

In this Reddit post, a user points out that according to the Social Security Administration, the wage cap only impacts about 6% of earners. So getting rid of that cap could result in a lot more revenue for Social Security without impacting the majority of workers.

That may be true. But because the wage cap only affects a small subset of workers, it may not be the most effective solution to Social Security’s financial woes.

There’s also another side of the coin to consider. Social Security has a maximum monthly benefit it pays retirees each month. And that maximum benefit is tied to the program’s wage cap.

If the wage cap is done away with, though, it’s unclear as to how Social Security will make higher earners whole on the extra money they’re putting in. If all other workers have their benefits calculated based on a specific formula, it seems pretty unfair to not use that same formula for people with higher salaries.

Also, it’s hard to ignore the fact that wealthy people tend to have a lot of political influence. Lawmakers may be hesitant to eliminate the wage cap for fear of angering their supporters.

For these reasons, lawmakers may not rush to lift the Social Security wage cap. But they do need to do something to keep the program solvent and prevent benefit cuts.

Thankfully, there are solutions they can look into that include raising full retirement age. Or it might take a more creative solution to address the problem. But eliminating the wage cap may not be optimal.

If you’re a higher earner who’s worried about the Social Security wage cap being eliminated, you may want to talk to a financial advisor. They can help you plan for that possibility, just in case.