Among all the social program in the country, Social Security is undoubtedly the most significant. For millions of elderly Americans, it is their financial rock because they get the benefits provided accounting for over half of all monthly income for 62% of workers who are retired. The program, by itself, kept 15.3 million of those elderly beneficiaries above the federal poverty line.
However, the way the program collects its revenue received was heavily criticized.
Understanding Social Security’s Main Source of Funding
There are three sources of social security funds that generated $996.6 billion in income last year:
The Social Security’s workhorse is the payroll tax and since virtually, no lawmakers in Congress want to make changes in Social Security’s primary source of being funded, means the program can never go bankrupt. The Social Security can lose $2.9 trillion in excess cash by 2034 as projected by the latest annual Trustees report, but it will have more than enough annual revenue to continue making payouts to qualified beneficiaries.
Why Social Security’s Payroll Tax Appears Flawed
Social Security’s payroll tax is the one to take the blame for the above-mentioned forecast. Since the payroll tax is set to cap in 2019 at $132,900, it means all generated income is taxable between $0.01 and $132,900. Anything lower than this amount is exempted. There are 9 workers out of 10 who earns less than $132,900 in a given year. This means a large number of Americans are making payments to Social Security with every dollar they gain. The wealthy people on the other hand, who earn more than this amount will see most of their income exempted from Social Security’s payroll tax.
Why Rich People Aren’t Getting Taxed More
A strong appeal of raising or completely removing the earnings cap on payroll tax is being made by Democrats on Capitol Hill. The idea is receiving a strong support from the public as well. If the cap is removed and all earned income to the payroll tax is exposed, there is a high chance of generating enough added income that the current payout schedule would be maintainable through 2092. In addition, if the payroll tax cap increasing, it would only affect a tiny percentage of workers.
This could lead you to the question: Why aren’t we taxing the rich more?
There are several reasons as to why it’s the case. The first one is because the Social Security Administration also put a maximum monthly payout cap on benefits at full retirement age. In 2018, it doesn’t whether you averaged $400,000 in yearly income for the rest of your life or $86 million, you are still better off than a monthly benefit check of $2,788. The existence of the monthly payout cap makes the amount that’s subject to taxation exists too.
Secondly, Social Security can only be amended if there is a bipartisan support. It’s expected that Democrats and Republicans agree on virtually nothing in terms of the Social Security. There is always a core solution to fix the program that works for each party. However, since their solutions work, neither party thinks there is a need to compromise and find common ground with their opposition. Social Security is no longer on the table of the short of having a supermajority of 60 seats in the Senate.
Lastly, to be quite frank – it could affect campaign financing. There’s no need to sugar coat here – the wealthy are the major contributors to the campaigns of those elected in Washington. If all of their earned income is suddenly applied with a payroll tax, there’s a high chance for these wealthy individuals to be upset. They might even reconsider or completely stop their contributions to various campaigns which are bothersome for lawmakers.
One thing is for sure, something needs to change about Social Security’s payroll tax but it’s doubtful to merit any attention for a long while.