My mother has worked a good quality white-collar job most of her life, and when we discuss taxes she often mentions that as her salary has increased, it constantly remains just under the “cap” of FICA contributions. That is, there is a limit to how much people pay each year in social security payroll taxes, currently reached at around $100k gross annual income.
Why does this cap exist? While a sales tax through which the wealthier spend more of their money on untaxed services and less on goods covered by the sales tax is regressive, it at least in theory applies to everyone in the same way. But the payroll tax system is the only inherently regressive tax system I have ever seen: there are two brackets, the bottom of which is some non-zero percentage and the top of which is zero.
I have found a ton of information about the existence of the cap and how it increases, but no one seems to ever explain why it exists, as though it is intuitively obvious and needs no discussion. An explanation I’ve come up with off the top of my head is that one can only collect so much in SS and thus it would be “unfair” to contribute beyond the point in which higher income would yield no more in future benefits. And that Medicare contributions are not capped because while they are also a payroll tax, they are a completely different animal since the benefits apply to everyone equally (something I have no proof of either).
edit: Probably should be in GQ, I was in the wrong forum when I realized I had this nagging question.
I’ll let someone more expert than I answer this, but my sense is that FICA is sold to the public as a “retirement contribution” and not a “tax.”*
The pretense is that you are contributing to a fund which will pay you when you retire. There is, of course, no such fund existing anywhere except as tricky IOUs paid by future “contributions.” Because there is an upper limit to what you get paid back, the idea is that there is an upper limit to how much you pay in.
The reason for the cap is that, like all taxes, you get it in the door by pretending it has some upper limit.
I can assure you that our current drunken spending spree, along with the fantastically high future spend about to hit us, will get rid of this cap and make it less “regressive.”
One quick beef: it is a complete misrepresentation to confuse “the wealthy” with “those who earn high wages.” They are often very different things, and the failure to distinguish them is, in my opinion, one of the real reason the tax system is as regressive as it is.
One useful way of thinking of Social Security is as an income insurance program. You pay in to an “insurance” fund, and if certain things happen (you get old, you become disabled, your parent dies, etc) then you are paid out benefits.
In this sense, Social Security isn’t really a pension, it isn’t welfare, it’s a government program that is like an insurance policy. And, in fact, if you take the real name of the payroll tax and spell it out, it is the Federal Insurance Contributions Act (FICA) tax.
Since there is an upper limit to benefits, there is an upper limit to premiums. There is debate every now and then about lifting the ceiling on the FICA tax to generate more income to the program to address the solvency issues that are projected to occur in a few decades’ time.
Pretending? The SS does have an upper limit, and has for more then a half-century. If it’s a ruse, it’s a ruse that has gone on longer then the lifetimes of the people that designed it.
But yea, the reason for the cap is that the effect of SS is supposed to be flat, each cohort will on average pay in as much as they payout, presumably because the designers of SS decided that making it a welfare system where only the poor collected from it wouldn’t be politically feasable. Since the payouts are capped, the payroll tax must be as well.
Because Social Security was originally conceived as something that was more forced savings + insurance than a redistributive tax scheme. It was supposed to provide a minimm amount to retirees in proportion to their earnings (or their spouse’s earnings) during their working lifetime. And if you became disabled, you got a benefit from the insurance component even before you reached retirement age.
Medicare of course isn’t paid out according to your earnings, it is paid out according to your need, so it is obviously redistributive. So there is no pretense that it should be funded in proportion to your expected benefit (otherwise we might only tax the first $10,000 at 10% instead of all wages at 1.45% because then almost everyone would pay $1000 a year, maybe you would have a married rate that was double). So medicare is not capped at all. It is a redistributive scheme, and it is funded by a tax that is either neutral to income, or regressive if you account for the fact that it only applies to wages, and higher income earners earn a lot more of their income from non-wage sources.
Social Security has a cap because that was deal that was insisted on for Roosevelt to get it passed. It was essentially a political issue.
The argument that since pay outs are capped, contributions should be to, may have been the argument at the time and it’s a pretty good one, depending on whether one regards the program as a social safety net or a mandated universal pension fund.
It is a pass through, as opposed to an investment, fund. That is today’s recipients receive through money from today’s payers, today’s payers become tomorrow recipients and get their money from tomorrow’s earners.
It actually generates a surplus - or did in the recent past - which theoretically would be set aside for such a time that the recipient pool gets bigger than the contributor pool. But that’s a fiction and the money is thrown into the general (paper) fund, to try to avoid actually paying for what we spend.