I’ve only quoted number three on this list from the Motley Fool article because it’s the one that is terribly misleading. You can read the other six at the link below.
3. Income inequality If you’re looking to blame the wealthy for this mess, you do actually have a case. You see, the aforementioned program workhorse, the 12.4% payroll tax on earned income, is applicable on earnings (wages and salary, but not investment income) of up to $132,900 in 2019. This “cap” usually rises every year in step with the percentage increase in the National Average Wage Index. The exception is when the cost-of-living adjustment is negative, which has happened only three times since 1975.
The problem is this: More than 9 out of 10 workers will earn less than $132,900 in 2019, meaning they’re being taxed on every dollar they earn. Meanwhile, the single-digit percentage of workers who’ll earn above $132,900 have every dollar beyond this figure exempted. That means millionaires — or even billionaires like President Trump — could have most of their income exempted from payroll taxation. The Social Security Administration estimates that $1.2 trillion in earned income escaped taxation in 2016, costing the program nearly $150 billion in lost revenue.
What’s wrong with this analysis? Well, to begin with earnings above the tax cap are not counted toward the Social Security benefit calculation so the use of “exempted” applies to both the earning and the benefits that are Social Security costs. This method of funding is not new and has all been considered in the actuarial estimates for funding Social Security. The real problem is the shrinking number of workers relative to the number of Americans collecting benefits. There is no lost revenue because the program should be able to operate as the law is written.
As far as millionaires and billionaires go, the vast majority of their income is not earned income as defined by the law, but rather dividends, interest and capital gains… again nothing new. It doesn’t count for taxes and it does not count for a benefit calculation.
Social Security has been headed for “big trouble” for decades. It has little to do with inequality or the increase in the wealthy. The Trustees have been warning of the coming crisis and urging action to address it for decades.
Here is what the Trustees said back in 2000, twenty years ago:
With the retirement of the “baby-boom” generation starting in about 2010, OASDI costs will increase rapidly relative to the tax- able earnings of workers. By the end of the 75-year projection period, the OASDI income rate and cost rate are estimated to reach 13.3 and 19.5 percent, respectively, under the intermediate assumptions, resulting in an annual deficit of about 6.1 percent. Thus, annual tax revenue would be sufficient to cover only about 2/3 of annual expenditures at the end of the 75-year period.
Note this is long before we became obsessed with billionaires, inequality or the politics trying to change Social Security from its intended purpose and funding mechanism of self-sustaining.