Remove the Cap on Social Security

8/14/12

I am apolitical by nature. The entire process of electing representatives, from city councils to Presidents, leaves me cold. Blame my extraordinary microeconomics professor H. Scott Bierman who was at Carleton College then but now is the President at Beloit College. He helped me crystallize a handful of tangential thoughts about our system into a unifying theory regarding what governs human behavior, political or social.

But that does not mean I don’t read a newspaper, watch TV news, or occasionally surf the Interwebs to watch the latest follies in politics and government. And what I see regarding the Social Security system is the single silliest and ridiculous “problem” that our country faces.

I am quite fortunate that, just like many other people, I have the pleasure of reaching the payday in the second half of the year when my FICA disappears and I have extra money. Found money.

But why is it so?

I don’t work for the Government Accountability Office, but I am pretty sure that if there was no Federal Insurance Contributions Act (FICA) limit, if we all paid FICA all year no matter how much we earned, that we could solve the Social Security problem. Current law says that employees pay 6.2 percent FICA tax on the first $106,800 of earnings per year to help finance Social Security. People who are fortunate enough to make more than $106,800 pay zero FICA tax on every dollar they earn above that cap. Obama favors phasing out that cap slowly over a number of years. Romney would probably not favor this – he would likely rather see no FICA at all and a privatization of our retirement benefits. But if you are going to eliminate the cap, why not just do it once and have it done?

As anyone who knows me well would tell you, I am no supporter of taxes of any kind. They are a coerced transfer of wealth from the people to the government, who then can spend the money any way it pleases. None of our founding fathers envisioned that as the desired outcome, and rightly so. Nobody should ever be forced, either as a rule of law or to a mugger in the streets, to give up what is rightly theirs.

However, if there is going to be a tax, at least let us not make it regressive and punitive to those who earn less. FICA is the most regressive tax in our system. It favors those who earn more than the FICA cap, and it punishes those at or below the cap in terms of earnings. Given the potential for insolvency in the Social Security system, abolishing the $106,800 cap on FICA is the simplest and fairest road forward.

Eliminate the cap on FICA. Fully fund Social Security.

Then we can begin working on how to balance the books in a fairer tax system, one that taxes everyone equally, and one which finances a much smaller government apparatus. The possibilities are endless.

Take this first small step forward and eliminate the cap on FICA.

Carl Weissman serves as Chairman and CEO of Accelerator, a joint investment vehicle backed by a syndicate of venture capital firms, and as a Managing Director at OVP Venture Partners. Follow @

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  • bdambrosio

    Hmm. Why is that “obvious”? Would you at the same time remove the cap on benefits? Why one and not the other? Most “insurance” offers a fixed benefit for a fixed cost, regardless of ability to pay. Social Security already has a subsidy for the poor built in. Hardly regressive. In fact, quite the opposite

  • Jay Ramsey

    The underlying problem . . .what will happen to the “new” revenue? Unless S.S. is finally reconstructed into a “real” trust so funds cannot be upstreamed to the treasury, nothing will be accomplished.

  • Trevor

    You say: “As anyone who knows me well would tell you, I am no supporter of taxes of any kind. They are a coerced transfer of wealth from the people to the government, who then can spend the money any way it pleases.”

    I don’t live in the USA, but this statement looks totally weird to me. You have the most democratically accountable government in the world, but you seem to think it spends money “any way it pleases”. Why do you guys spend so much time & money on elections if you end up with a government that does that? Why don’t you elect representatives who make sure that doesn’t happen?

    Is it because the US electorate is too stupid, or what?

    • Richard Gayle

      Trevor makes a good point. We control how taxes are raised and disbursed.

      Now I am not as learned as Carl, with economics training from such sterling professors. I was too busy trying to pass Organic Chemistry at CalTech to take any economics classes. But I did take a lot of history classes. We cannot tell where we are going without understanding where we have been.

      Taxes have apparently been a requirement of every major civilization mankind has created at least over the last several millennia. We can, perhaps, hypothesize that the structure of a society that helps individuals create wealth requires some pay back for that support.
      No one really likes taxes. Our Founding Fathers were not and that is why they gave sole budgeting power to the People’s House. I’d love not to pay any. In a perfect world, nobody should be forced to do anything.
      We do not live in such a hypothetical world and taxes appear to be an important part of any successful human society.

      The fact is, we do not have kings raising taxes on us. We pass taxes on ourselves. It IS a transfer of wealth but we chose how it gets spent, not oligarchs. I might argue that our distribution of tax monies has been some of the most efficient in mankind’s history.
      And, because we elect the people who create and distribute taxes, it is up to us to make sure they are fair.
      Carl describes one way to make them fairer. I’d second that approach.

    • cdmsr

      Not the entire electorate, just the retrograde Right.

  • Helena Smith

    And when we’ve eliminated the cap the next two steps will be: [1] assess FICA on MAGI, not just earned income associated with a reduction in the tax rate, and [2] show the employers contribution on pay stubs so that we all know the real cost of SS.

  • Observer

    And why is any of this, basically political discussion, on Xconomy in the first place? Do we not get enough of this sort of diatribe everywhere else?

  • CitizenZ

    I agree, everyone should pay FICA on 100% of their earnings. Let’s do it. It’s a good start and there are many more loopholes that could be closed. Anyone who has half a brain can see that cutting taxes and spending alone is not going to do it. When financial armegeddon comes gold nor money is going to save you, only lead and brass. If people truly love their country as they say they do then now it the time to act in her time of need and hopefully avoid a major meltdown.
    Brave for your article sir.

  • Observant

    FICA ≠ Social Security. Social Security indeed has a cap, but FICA also includes Medicare, which does not have a cap and is much insolvent than even Social Security.