Should the rich pay more into the Social Security system?
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Listener Sandra Kriz from Omaha, Nebraska, asks:
Social Security deductions are only taken from income up to $160,000. However, Social Security payments are based on all income earned. So the very rich pay in a very small percentage of their income, but can end up getting really big Social Security checks. How is this fair and why is this never considered when talking about Social Security solvency?
Sandra is right that there’s a limit to the amount people get taxed on when they pay into Social Security each year, which is known as the taxable maximum or the taxable earnings base. In 2023, this maximum stands at $160,200.
The tax rate for your wages is 6.2%. So let’s say you make the max amount of $160,200. You’ll pay 6.2% of that figure into the Social Security system.
Doing a little math, 6.2% of $160,200 equals a little more than $9,932. (Your employer has the same tax rate, and will also pay that same figure into the system.)
Now, let’s say you make above that amount. Whether it’s $160,201 or $1,000,000, you still only pay in $9,932 because we have that limit on how much of your income gets taxed.
But, even though benefits begin to go up the more you pay in, those benefits also eventually get capped.
The Social Security Administration has a FAQ on its site that outlines the max benefit you can get in retirement, which is based on the age you retire and your lifetime earnings. If you retire in 2023 at the full retirement age, which varies between 66 and 67 depending on when you were born, the max benefit is $3,627.
If you retire at age 62 this year, the maximum benefit is $2,572, and if you retire at age 70, the max is $4,555.
People who have made the same amount as, or more than, the Social Security’s taxable maximum income for at least 35 years are eligible for the max benefit, according to the AARP. The tax max generally changes year to year, because it’s based on average national wages.
For those who are making above the tax max, their benefits will actually be a smaller percentage of their income compared to lower-income people, explained Tyler Bond, the research director for the National Institute on Retirement Security.
But for those who are lower-income, as Sandra alluded to, the amount they pay into Social Security will be a higher percentage of their income compared to those who are making above the tax max.
Wages are escaping taxation
Over the years, the tax max has changed. It was originally set at $3,000 when the Social Security system was established in 1935, and used to increase on an ad hoc basis, Bond said. Now, the max increases when the national average wage index rises.
There are about 6% of workers covered by Social Security who earn above the tax max in any given year. This percentage has stayed around this amount since the 1980s, according to a report from the Congressional Research Service.
But there’s a problem with this. Top earners have experienced faster wage growth than those who are lower-income.
Their wage growth has increased more quickly than the taxable maximum (which increases based on average wage growth). A rising gap between top earners’ salaries and the taxable maximum has resulted in greater earnings that aren’t subject to Social Security’s payroll tax, explained the CRS report.
The share of aggregate earnings not subject to Social Security taxes rose from 10% in 1982 to 19% in 2021.
Should we get rid of the tax max?
There have been calls to increase the tax max or eliminate it entirely to address income inequality and financing concerns with the Social Security system, Bond said. A report from the program’s trustees said that Social Security’s main trust fund is set to be depleted in 2033 — a decade from now.
“If the trust fund were to be depleted, Social Security still would be able to pay benefits, but those benefits could be reduced by 20%-25% across the board if Congress chooses not to use other resources to support current benefit levels,” explained a recent report from the National Institute on Retirement Security.
But Bond said that abolishing the tax max raises questions about what to do with benefits. Should that also go up if higher-earners are getting taxed on more of their income? Or should benefits remain capped, even if more of their income gets taxed?
The Social Security Administration has dozens of provisions on its website explaining the financial effect that certain changes in payroll tax rates and the taxable maximum would have on Social Security.
Teresa Ghilarducci, a professor of economics at the New School for Social Research who wrote about this issue for Bloomberg, said in the piece that eliminating the earnings cap would be “an easier solution” compared to other methods like increasing the payroll tax. Ghilarducci wrote that the U.S. has made similar changes in the past, eliminating the income cap on taxes for Medicare funding.
“Keeping a cap on benefits and eliminating the cap on revenue gets you to solvency and even more money to help raise benefits,” Ghilarducci told Marketplace.
Lawmakers have also unveiled proposals with other methods to help fund the Social Security system.
U.S. House Rep John Larson of Connecticut, for example, has authored legislation that would expand Social Security’s payroll tax to apply to individual earnings above $400,000, leaving a donut hole (or lack of additional taxes) for earnings between the tax max and that $400,000. Ghilarducci pointed out that there are also debates about whether to tax other forms of income, such as capital gains.
But before any proposals are passed by Congress, Ghilarducci said we might have to wait until there’s “a more immediate solvency problem.”
Polling shows there is voter support for tax increases on the rich.
A 2022 poll from Gallup shows that 52% of Americans are in favor of the government imposing heavy taxes on the rich in order to redistribute wealth. Another poll, from the National Academy of Social Insurance back in 2014, found that 83% of Americans are specifically in favor of preserving Social Security benefits, even if that means increasing taxes on the wealthy.
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