Read the following from the Motley Fool via USA Today
Even income inequality has reared its head and hurt Social Security. We’re witnessing a greater percentage of earned income being exempted from Social Security’s payroll tax – $300 billion in 1983 versus $1.2 trillion in 2016 – while also seeing the well-to-do live significantly longer than lower-income folks whom the system was designed to protect. Ultimately, it means a lot of Social Security income is winding up in the hands of the wealthy.
Let’s be clear, “wealthy” in this context is earning more than the Social Security taxable wage base, currently $128,400 and going to $132,900.
The benefit provided by Social Security is calculated on earnings up to the taxable wage base so with the same earnings record a person earning $132,900 and one earning $1,000,000 will receive the same benefit in retirement and have paid the same in taxes into the system (assuming consistently earning the maximum taxable).
Social Security income winds up in the hands of people who earned it (and many who didn’t) and no more to the wealthy, who by the way pay considerably more in payroll taxes and then income taxes on their benefits.
In addition, the benefit formula provides a higher benefit on earnings to the lower income worker.
The 2019 formula is:
AIME = average indexed monthly earnings.
As you can see there is a significant lower relative benefit provided for anyone earning more than $66,996 a year ($5583 x 12). In other words for those whose income reaches and exceeds the taxable wage base nearly half their average income earns only 15% in Social Security benefits.
A case can be made to increase or even eliminate the taxable wage cap as long as the earned benefit increases proportionally otherwise Social Security moves from a funded benefit to a form of welfare.
Even now as you can see from the formula, higher income earners subsidize others. In addition to payroll taxes, this is true because higher earners pay income tax on their Social Security benefits most of which goes toward paying SS benefits (the rest goes to subsidize Medicare).
Categories: Social Security