My biggest complaint about a static level cap is that jobs/classes don't really seem to grow and change if the level cap is not raised. A Black Mage in FFXI in 2005 at level 75 was exactly the same as a Black Mage in FFXI in 2009 at level 75 still. Outside of balance related adjustments (i.e.- weak jobs getting buffed, strong jobs getting nerfed), there isn't much playstyle advancement. And that leaves classes feeling stale. If I was stuck with Cure III, Blizzard II, and Tornado for 5 years and no new spells in sight, it would seriously put a damper on my enjoyment of the game.

Now having said that, I suppose a merit-like system could help to switch up gameplay without actually having to raise the level cap. If, rather than raising the level cap every so often, you added another tier of merits to each class, I think that would be okay.

I think what I would prefer is a system like you mention in your edit of your OP: Older gear can be upgraded to higher levels via crafting or quests. However, I'd also add something where you only got the older drops from the older content if you chose to do it with a level cap restriction on, but you could still do the content at higher levels with no level restriction with no drops if you just wanted to see the content. i.e.- If it were FFXI, you could run Dynamis at level 90 under a level restriction of 75 to get old endgame loot and upgrade it to level 90, or you could just run it at level 90 with no restriction to complete it for story purposes but get no loot drops.

Make the upgraded gear a sidegrade to the newer endgame gear, and not only do you open up more interesting gearing options, but you make that old content remain relevant and challenging, without preventing more casual players from ever at least seeing that old content.