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The maximum amount of earned income taxable by the United States government for Social Security is called the FICA limit. The term FICA limit is somewhat misleading because it includes Medicare tax, which is applied to all earned income, without limit. The FICA limit also determines the maximum amount of Social Security benefit the retiree will receive in his first year of retirement. Subsequent years may see an increase in benefits because Social Security benefits are indexed to inflation.
FICA, an acronym for Federal Insurance Contributions Act, is rooted in the Social Security Act signed by Franklin Roosevelt on 14 August 1935. The original intent of the legislation was to supplement any savings or pension that the elderly poor might have, and to provide some money for the elderly indigent. The social norm had been to save money for retirement and for a "rainy day," but the Great Depression brought 25% unemployment and bank failures that destroyed the savings of most working Americans.
The second component of FICA, Medicare, was signed into law by Lyndon Johnson on 30 July 1965. The costs of medical care and prescription drugs were exceeding the total Social Security benefit for many retired people. As part of his War on Poverty, President Johnson created and Congress passed this act. In 1972, under President Richard Nixon, cost of living adjustments were added to Social Security to deal with the erosion of purchasing power caused by inflation over time.
Originally, the Social Security maximum taxable amount was set by Congress. In the second half of the 20th century, inflation created by World War II and the Korean War caused Congress to revise the limits with ever increasing frequency. In 1977, Congress revised the Social Security Act to provide an indexing mechanism to the FICA limit. That limit is now determined by the national average wage index as maintained by the National Bureau of Labor Statistics.
The legislative history of why there is a FICA limit is murky at best. Some have claimed that the reason for a limit is to avoid large benefit payments to the wealthy who do not need it. The 16th Amendment permits the taxation of income without constraints on how that tax money is spent. Therefore, Social Security benefits can be capped even though Social Security taxation is not limited. A FICA limit benefits high income earners.
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