As we get closer to 2035 +- Congress will eventually take action to avoid cutting Social Security benefits. Under its theme of “fair share” the political left will look to simply have higher income workers pay more by raising the taxable wage base. That mostly takes more from upper middle-class employees, not the super rich who typically have modest or zero salary income.
If the taxable base is increased, is it fair if that is not accompanied by higher benefits at retirement by taking all taxed earnings into account as is the case today? Raising the wage base even with a higher benefit provides some slight improvement in the Trust status because the benefit calculation is skewed to lower income workers.
Raising those taxes with no increased benefits provides significant benefit to the Trust, but still does not make Social Security fully sustainable.
Sometimes fair is in the eye of the beholder. Let’s say a family income is $250,000 split between spouses. If the cap is eliminated this couple sees no change in taxes paid. But if that same income is earned by one family member, taxes go up approaching double. If there is no accompanying increase in benefits, this family is even worse off.
Social Security is in trouble. In April, the program’s Trustees reported that Social Security’s trust funds could run out of money by 2035. Once that happens, the program may have no choice but to cut benefits to compensate for a lack of revenue. The bulk of Social Security’s revenue comes from payroll taxes — the ones everyone has to pay on earnings, up to a certain point. In the coming years, Social Security’s primary revenue stream will shrink as more and more baby boomers end their careers and not enough people enter the workforce to replace them.
As such, the program will owe more money in benefits than it can pay. It does have its trust funds to bridge that shortfall, but only for so long, and once those funds run dry, substantial benefit cuts may be on the table. Of course, cutting benefits would be catastrophic to the many seniors who already rely on Social Security for the bulk of their income, and it could also be similarly harmful to future recipients who plan to do the same.
As such, lawmakers are invested in a solution to prevent benefit cuts from happening, and increasing Social Security’s primary revenue source — payroll taxes — has been a popular suggestion. But it’s also a solution that’s not nearly as feasible as it may seem.
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