Raising the Cap on Taxable Income Has Drawbacks

Tom Margenau
Tue, 17 Mar 2026 23:00:00 -0700
Lifestyle

I have probably written 100 columns about possible Social Security reforms. Well here comes column number 101!

What is prompting my discussion of the issue this time is that a certain reform proposal has been getting a lot of press lately. It is probably the most popular and most supported of all potential Social Security reforms. But there is one big drawback to the proposal that very few people ever mention. Today I will explain it.

I am talking about the recommendation to eliminate the wage base — the amount of earnings subject to Social Security taxes. Or at least be dramatically increased.
Updated: Wed Mar 18, 2026

I have probably written 100 columns about possible Social Security reforms. Well here comes column number 101!

What is prompting my discussion of the issue this time is that a certain reform proposal has been getting a lot of press lately. It is probably the most popular and most supported of all potential Social Security reforms. But there is one big drawback to the proposal that very few people ever mention. Today I will explain it.

I am talking about the recommendation to eliminate the wage base — the amount of earnings subject to Social Security taxes. Or at least be dramatically increased.

Since the Social Security program began in 1935, the law has set a limit on the amount of earnings subject to Social Security tax. In 1935, the wage base was $3,000. It has gradually increased over the years. For many years now, that increase has been automatic based on growth in the national average wage index. The current (2026) wage base is $184,500.

What that means is that a rich guy like Elon Musk pays the same amount into Social Security as his plumber does. (Of course, that's assuming Elon's plumber is a very successful one!) But you get my point. Anyone making more than $184,500 per year pays the same amount in Social Security taxes. So whether you make $190,000 per year, $1.9 million, or even $1.9 billion, you pay the same Social Security taxes.

That is why millions of Americans, and many policy planners, pundits and newspaper editorial writers, support an increase to the wage base. Or again, even the total elimination of the wage base.

But there is another side to this proposal that I have seen very few people write about. And here it is. Social Security benefit payments are directly tied to the amount of earnings on which you pay Social Security taxes. Simply put: the more you pay into the system, the more you are going to get out of the system.

In other words, if rich people pay taxes on their very high incomes, they are going to eventually get Social Security benefits based on those very high incomes. What that means is that much of the extra income from the higher taxes they pay will be offset by the extra Social Security benefits they will receive someday.

The current maximum Social Security retirement benefit is $4,152 per month — meaning that someone who has paid taxes on maximum earnings all their life will get a monthly Social Security check of $4,152. I haven't seen any analysis of how eliminating the wage base would affect future Social Security benefits. Still, I can see how, someday, with no limit on taxable earnings, rich people could be getting Social Security checks in the $20,000 to $30,000 per month range!

To stop that from happening, and to make this popular reform proposal work, what you would probably have to do is greatly increase, or even eliminate the taxable wage base, while at the same time setting a limit on the amount of benefits payable.

In other words, we'd be telling rich people this: "You are going to pay a lot more in Social Security taxes, but you're not going to get very much more in Social Security benefits."

I've heard from many readers over the years who support this proposal. And their arguments usually have an unspoken message along the lines of "Those rich people can afford it." Or "It's time that rich people pay their fair share." But let me remind you that the current wage base is $184,500. Many of you may think of people making that kind of money as "rich." But I'm sure a whole lot of people reading this column make that kind of money every year. And I'll bet most of them think of themselves as "comfortable" or maybe "upper middle class." But they don't think of themselves as rich.

The point I am making in this column is that just as there are two sides to every coin, there are two sides to every Social Security reform proposal. In fact, here are some other possible reforms to Social Security. And I will give both sides of the coin for each of them.

Proposal: Raise the Retirement Age to 70 by 2060

One side of the coin: People are living longer, healthier lives, and with enough lead time, they can plan for the delay in receiving their benefits.

The other side: Would you really want to work until you are 70? Employers will face higher health care costs for older workers.

Proposal: Reduce COLAs Paid to Social Security Beneficiaries by Half a Percentage Point

One side of the coin: Economists believe the current formula overstates inflation for seniors.

The other side: COLA reductions are cumulative. The longer you live, the more you will suffer financially.

Proposal: Reduce Benefits by 5% for All Future Retirees

One side of the coin: All retirees should share responsibility for shoring up Social Security.

The other side: Lower-income beneficiaries could not afford the reduction.

Proposal: Means Test the Program Lowering Benefits to Wealthy People

One side of the coin: Ensures that Social Security is paid only to those who need it most.

The other side: Would turn Social Security into a welfare program.

Proposal: Raise Social Security Payroll Tax by Half a Percentage Point

One side of the coin: The tax has not been increased in more than 40 years.

The other side: An extra tax burden would discourage savings and investment.

Proposal: Make Folks Pay Income Tax on all Social Security Benefits (currently, only a portion is taxed)

One side of the coin: All other pensions are fully taxed.

The other side: It would affect middle-income taxpayers the most.

Proposal: Require All State/Local Government Workers Pay Into Social Security

One side of the coin: All working Americans should pay for Social Security.

The other side: It would jeopardize many well-run government employee pension plans.