Why is Social Security considered regressive?

• A. It takes a larger share of income from middle and lower income workers than the affluent due to the earnings cap
• B. It is funded entirely through state taxes
• C. It taxes all income at the same rate
• D. It provides more benefits to high earners

Answer: (A)

The main idea is that the funding mechanism for Social Security is regressive because of the earnings cap. The payroll tax rate (a flat percentage) applies only to wages up to a certain cap. Lower- and middle-income workers have all of their wages taxed, so the tax takes a larger share of their income. Higher-income workers pay the tax only on earnings up to the cap, so a smaller share of their income goes to the tax. In other words, as income rises above the cap, the remaining income isn’t taxed, making the tax burden a smaller percentage of income for high earners. It’s worth noting that benefits can be structured in a way that is more progressive, but the payroll tax itself is regressive due to the cap.