What if Social Security Was Capped at $100,000 Annually?

One weird trick could extend Social Security's solvency while reducing payments to the wealthiest households. But it doesn't go far enough.

As Social Security careens towards insolvency in the early 2030s, policymakers and the American public will have to reconsider what the old-age pension program is meant to accomplish.

Is Social Security meant to provide a safety net for senior citizens, ensuring that those who do not have sufficient private retirement savings are kept out of poverty? Or is it meant to finance lavish retirement lifestyles for those who earned large sums during their working years?

Social Security was intended to be the former—President Franklin Delano Roosevelt promised that it would protect against "poverty-ridden old age," when he signed the program into law in 1935.

These days, however, it often operates as the latter. This year, households where both couples maxed out their Social Security contributions during their working years will be eligible to receive as much as $124,000. Most households do not qualify for anywhere near that much, of course, but the fact that younger (and generally much poorer) working-age Americans are being taxed to finance six-figure retirement payments for the wealthiest retirees is finally getting some of the scrutiny that it deserves.

It might also point the way towards a partial solution for Social Security's fiscal problems.

Capping annual Social Security payments at $100,000 per household (or $50,000 per individual) would help extend the program's solvency without raising taxes on workers or cutting benefits to retirees who actually depend on the program to make ends meet, according to a report published last month by the Committee for a Responsible Federal Budget (CRFB). The so-called "Six-Figure Limit" on Social Security payments would save an estimated $190 billion over ten years and would close nearly half of Social Security's long-term fiscal shortfall.

The $100,000 cap would "meaningfully slow the growth in Social Security's burgeoning generosity at the top, limiting benefits from growing too far past what is necessary to provide for 'a measure of protection' in old age," the CRFB argues.

Beyond the raw fiscal math, capping Social Security payments at $100,000 annually has a few other merits.

First, it's the sort of change that politicians could support even if they refuse to acknowledge Social Security's coming insolvency.

That's because the cap would affect relatively few participants—just 0.05 percent of all retirees this year, according to the CRFB's estimates—and doesn't cause significant harm to any of them. After all, those households will still be receiving an annual transfer payment of $100,000 from current workers. That's "more than five times the senior poverty threshold," as the CRFB points out.

Those households are also the most likely to be sitting on massive private retirement savings. The CRFB's estimates show that current retirees receiving more than $100,000 in annual Social Security benefits have an average net worth of more than $65 million and more than $2.5 million in retirement savings.

Simply put: there is no political constituency that can reasonably stand in the way of this reform. Anyone who thinks a government that's $39 trillion in debt should prioritize sending six-figure benefit checks to the wealthiest subset of retirees should not be taken seriously.

Second, this change would encourage people to think differently about what Social Security is supposed to do—and, as I said at the start, that will be necessary as the program approaches insolvency.

Across partisan lines, there is a powerful sense that Social Security benefits are just somehow different than other things the government spends money on. Largely, that's due to a successful marketing effort that convinced Americans—incorrectly, it should be noted—that they have some moral or legal right to Social Security.

There is no such thing, and Social Security spending is fundamentally no different than government spending on the military, welfare, or anything else. The American public is in for a rude awakening when Social Security hits insolvency, and benefits get automatically cut by 23 percent across the board—that will make it clear that Social Security's promise was always subject to change.

Capping benefits at $100,000 annually might make some people realize that Social Security does not exist outside of the rules that govern all government programs. All taxes and all spending come with trade-offs. We should be more willing to weigh those trade-offs, even when Social Security is part of the discussion.

On the other hand, there are a few downsides to this idea.

First, the $100,000 cap is insufficient to actually solve the insolvency problem. It might buy a bit more time, but ultimately, Social Security will require bigger benefit cuts or massive tax increases.

If implementing the cap is seen as a sufficient enough change on the benefits side, it might encourage politicians to fill the rest of the shortfall with tax increases. That would be a terrible outcome, as it would place an even larger burden on current workers to continue funding a fundamentally broken entitlement system.

Finally, the best way to address Social Security's problems is with a more comprehensive overhaul. That likely means benefit cuts for those getting less than $100,000 annually.

In 2022, the Congressional Budget Office calculated that Social Security's insolvency could be fixed by giving all seniors a flat monthly payment equal to 150 percent of the federal poverty line—about $1,700 per month, or $20,400 per year ($40,800 per household).

That's not an ideal solution, either, as it wouldn't save workers from continuing to pay payroll taxes. Still, it would be a huge improvement over the status quo and would ensure seniors are kept out of poverty. That's what Social Security was originally designed to do, after all.

If Social Security is to continue at all, it should be narrowly tailored to focus on that original goal. Eliminating benefits in excess of $100,000 would be a partial step in that direction.