Does any of the quote below make sense to you? It shouldn’t because if earnings are not counted for Social Security taxes, they are not counted for Social benefits. If one person has earned a steady $132,000 and another $1,320,000, they pay the same in taxes and receive the same benefit upon retirement. Social Security is a progressive benefit which means the lower one’s income, the higher proportional benefit they receive and hence a greater return on their tax investment.
What these “experts” are talking about is turning Social Security into a new form of welfare beyond what is already the case. To keep SS solvent requires increasing it’s revenue and/or reducing future benefit obligations. Reducing benefits is not a viable option. So how do we increase revenue?
To stay with the basic concept of SS we should increase the payroll tax; something that should have been started many years ago. And, as long as benefits are calculated on the higher amount, raise the taxable wage base as well. It’s quite simple.
The problem is politicians want to avoid the truth and the political left wants to change the very concept of the program by shifting a greater disproportionate portion of the funding obligation to higher income Americans while lowering their benefit return.
Social Security taxes aren’t sufficient to pay full benefits mainly because of extreme earnings inequality and diverting wage increases to pay ever-increasing health insurance premiums since back in 1983 when the Social Security tax was last raised by Congress and the President.
According to Urban Institute economists Karen Smith and Eric Toder the inequality of wage income and taxable wages escaping as health insurance premiums are the most salient and unexpected reasons for the shortfall.
The Economic Policy Institute has found that most labor earnings growth since 1979 has gone to the top earners; the top 1 percent wages grew 138 percent since 1979, while wages for the bottom 90 percent grew only 15 percent . . .
If we did nothing to the basic bones of the system and only taxed earnings not wealth and raised the cap (and benefits were not increased), 88% of the short fall would be solved. Or we could not touch the earnings cap, but increase the FICA tax from 12.4% to 15.23%. The employee and employer would each pay 7.615% instead of 6.4% to close the entire gap. Really, take a pause. If we raised the FICA and elminated the cap Social Security shortfall would be solved and we would have moved a long way to fixing the next coming retirement crisis.
The payroll tax is applied to the first $132,900 in 2019. The earnings used to calculate a benefit are based on the same number. So does it matter what individuals earn about that taxable wage cap?
The political left creates the impression that a handful of people escape Social Security taxes on most of their earnings and simply raising the taxable wage level on them is somehow fair. The fact is about 15,000,000 Americans earn above the current taxable wage base and the vast majority are not millionaires.
Indexed earnings used to compute initial benefits
When we compute a person’s retirement benefit, we use the national average wage indexing series to index that person’s earnings. Such indexation ensures that a worker’s future benefits reflect the general rise in the standard of living that occurred during his or her working lifetime.