Published 12:18 p.m. ET August 8, 2020
With an aging population rapidly increasing, securing Social Security funds is now more important than ever. But how did we get here in the first place?
Next week, Social Security will celebrate its 85th anniversary since it was signed into law. Undeniably, it is America’s leading social program, benefiting more than 64 million people a month and pulling 22 million of them out of poverty.
However, it is also the program that has faced its biggest crisis since its inception.
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Every year, the Social Security Administration issues a report detailing the short-term (10 years) and long-term (75 years) prospects for the program. For each of the past 35 years, the Commission has warned that long-term revenue will not be enough to cover projected expenditures. This is a fancy way of saying that the current billing schedule, including cost of living adjustments, was unsustainable for the 75 years after the report was released.
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As time passed, the program’s unfinished obligations had increased many times over. According to the latest report, the Social Security Administration is estimated to face a funding gap of $ 16.8 trillion between 2035 and 2094. If the shortage is not addressed, workers Retired employees may see their payout drop as much as 24% by 2035.
How could such a time-tested program suddenly experience a near 17 trillion dollar spike? Look no further than an ongoing series of demographic changes. Besides visible changes, such as the retirement of Baby Boomers and increased life expectancy, we are seeing other trends, such as increasing income inequality, contributing to disaster for Social Security.
The question at this point is not whether Social Security is in trouble, because it clearly is. Instead, is that how the lawmakers fix it?
Taxing the rich is the preferred measure of social security
If you ask the public, the most favorable solution, in the long run, would be to tax those with higher incomes.
By 2020, all earnings (i.e. wages and salaries, but not investment income) between $ 0.01 and $ 137,700 are subject to a 12.4% payroll tax by Social Security. festival. This payroll tax is responsible for generating $ 944.5 billion out of the $ 1.06 trillion the program raises in 2019, so it’s critically important to Social Security.
It is important to note that the limit exists at $ 137,700, meaning that all earnings above this level are exempt from payroll tax. Although this maximum taxable income limit increases almost annually with the percentage increase in the National Average Wage Index, it still allows the rich to avoid the payroll tax on a portion – or maybe the majority – their earnings.
Between 1983 and 2016, the amount of tax-exempt income paid for wages nearly quadrupled from $ 300 billion to about $ 1.2 trillion in the north. This has allowed neighborhoods with $ 150 billion in taxable revenue to “escape” from the system annually in recent years.
The most favored proposal to fix Social Security would see this maximum taxable income limit raised or eliminated entirely. Raising it typically involves creating a loophole between, for example, capped under $ 137,700 and $ 250,000 or $ 400,000 where this waiver will remain. The tax would then rise above $ 250,000 or $ 400,000, thus boosting Social Security’s revenue and getting the rich to pay their fair share.
Another factor to consider is that 94% of working Americans are likely to make less than $ 137,700 by 2020, and are therefore paying Social Security on every dollar they make. Therefore, raising or removing the payroll tax income limit will affect only 6% of workers. Since this change won’t affect the vast majority of workers, it’s quite common.
By itself, taxing the rich is not enough to save Social Security
Unfortunately, there’s a cruel reality that needs to be faced with the rich tax argument: It won’t save Social Security.
Besides being told that the rich don’t share their fair share, there are two main reasons that taxing those on high incomes won’t be enough to close the Social Security funding gap over the next 75 years. .
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First of all, the better off are more likely to change the way they generate income if the tax rules for Social Security are changed. As has been noted, almost all forms of investment income are exempt from salary tax. Adjusting the payroll tax at $ 250,000 or eliminating it all will force the wealthy to generate more income from investments. This would shield additional income from payroll taxes and lead to Social Security earning less revenue than originally forecast.
Second, but arguably more important, taxing the rich does not take into account some of the other ongoing demographic changes that are negatively affecting Social Security. In no special order:
- Net legal immigration has decreased: The Social Security program builds on the projected younger legal immigrants entering the United States each year to help offset the number of older workers who choose to retire and claim their benefits. Over the past two decades, the number of legal immigrants entering the United States has decreased, which will weigh on the ratio between employees and beneficiaries.
- US fertility rates are at an all-time low: The Social Security program is averaging nearly two births per woman of childbearing age. However, the latest fertility data shows that the US is at an all-time low. If births are not received early, it will also affect the ratio of workers to beneficiaries.
- Low productivity / low inflation environment: For more than a decade, the Federal Reserve has kept its federal funds rate at historic lows, or well below their historic averages. For Social Security, more than $ 2.9 trillion in asset reserves are invested in a special issue bond, which means less interest income.
The problem is, even if Social Security could collect additional income by taxing the rich, it would only buy decades of solvency. While I’m not saying that’s a bad thing, it’s important to note that raising taxes on the rich is not a solution that in itself can save Social Security.
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