In the first few hours of 2024, over 220 U.S. workers will have likely paid all their Social Security taxes for the entire year. In contrast, over 160 million workers will pay all year.
In 2023, the maximum earnings subject to Social Security taxes was $160,200, in 2024 it is $168,600. Elon Musk earned $168,600 in about 4 minutes. It took Tim Cook of Apple
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The point is a lot of income escapes the Social Security system; and the escaping-income is from the wealthiest Americans. If we raised the cap on the maximum earnings subject to Social Security taxes, and included more pay in the definition of earnings, we could more than pay for promised Social Security benefits for decades to come and even have some money left over to eliminate poverty among all Social Security recipients.
Here’s a quick primer on Social Security finances. The payroll tax of 12.4% is statutorily split between employees and employers. That means a worker is subject to a 6.2% tax assessed on earnings up to the earnings maximum that increases every year, in 2023 it was $160,200 and in 2024 it will be $168,600. In 2022, about 180 million Americans and their employers contributed $945 billion (see Table 5) to the Old Age, Survivors, and Disability system in 2022. If the cap for Social Security had not existed (there is no cap on Medicare taxes) the some 5% of U.S. workers who earn more than Social Security’s taxable maximum would increase revenue by more than $22 billion. If the earnings maximum had been eliminated (and the definition of earnings expanded) just 10 workers would have paid $3.4 billion more.
The Social Security Short-Fall
The notion of a Social Security deficit is a bit complex. Full benefits are being paid now. And it is highly unlikely the system will cut benefits suddenly. Moreover, the Social Security system is rather cheap by OECD standards. Promised benefits assume only 7.5% of American GDP, compared to the shares in Japan, Germany, France, and Italy which are well over 9% of their GDP.
But, if Congress and the President do nothing, Social Security will be able to pay only 77% of promised benefits by 2033. No one is suggesting solving the shortfall by only raising taxes; expanding the tax base is almost always more efficient. The most common way to express Social Security’s deficit is how much the payroll tax must increase to pay promised benefits for 75 years. And that amount relatively small, just 3.62 percentage points (1.81 percentage points to each the worker and employer) needs to be added to the total 12.4%. A tax increase would be fairly painless, but an even better solution is to expand the base by raising the earnings cap. If the earnings cap were eliminated entirely and benefits for the highest earners stayed the same, the extra revenue would solve the longer term financial gap for 35 years, according to a report by the Congressional Research Service.
It is clear the major cause of the current Social Security deficit is long term stagnant earnings. Because most of the earnings growth has been for those who earn more than the cap, over the last 40 years, Social Security’s taxable wage base has shrunk terribly. The other factor is that non-taxed benefits, such as health insurance, have grown. people earning high wages have received bigger raises than the bottom 95% of earners. The Economic Policy Institute’s economists Elise Gould and Josh Bivens estimate wage inequality deprived the system of $1.4 trillion (almost the size of the current Social Security deficit.
Legislation IS Ready To Be Passed
One of the best aspects of Social Security is the Office of the Chief Actuary and the office holder’s unsung hero Stephen C. Goss. That Goss is trusted by experts and partisans on both sides is one of the reasons Social Security’s numbers aren’t endlessly debated. What to do about Social Security is a battle over vision, values, and politics, not bickering mathematicians.
Anyone can examine the major proposals and options for fixing Social Security finances by going to The Office of the Chief Actuary’s webpage to read their easy-to -understand analysis of the estimated effect on the financial status of the Social Security program and/or the SSI program. Most are small-bore proposals, tweaking this and that. The major proposals most often come from stalwart Representative John Larsen, a Connecticut Democrat, who has offered a comprehensive plan year after year to raise Social Security revenues including raising the earnings cap.
Social Security Works, a nonprofit Social Security think tank is another good source for updates on Social Security legislation. In February 2023, The Social Security Expansion Act, introduced by Senators Bernie Sanders (I-VT
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If you think tax increases for Social Security is impossible remember, in 1994, a bipartisan Congress eliminated the income cap for Medicare. Both Republicans and Democrats want to save Social Security. The majority of Americans want more revenue for Social Security. The quickest way to get it might just be to be ask the small fraction of the highest income Americans – especially the 200 some-odd — to pay more.