Today we’re talking about why taxing the rich will not fix social security as many believe. And I’m backing this up with facts.
Make The Rich Pay More
One of the most popular suggestions that I hear for fixing social security is to simply increase or eliminate the maximum taxable wage base thus making high income individuals “pay the same as everyone else.”
It’s widely believed that the issue with the social security system is income inequality and a system that’s stacked in the favor of the wealthy. While it’s true that income inequality does exist, I wanted to find out if the insolvency of the social security trust fund could really be fixed by raising taxes on the wealthy.
Thankfully, I didn’t have to launch my own research project and hire a room full of Ph.Ds. The Congressional Research Service has already done the heavy lifting for me in this report which was updated in late 2018.
How Much Is Subject To Tax?
Before we get into their findings, let’s take a look at what the issue actually is.
Currently, in 2019, the first 132,900 dollars in wages is subject to the 12.4% social security tax. Taxes over that amount are not subject to that tax. This leads lots of politicians and talking heads to suggest that the easy fix to all of the SS funding can be found within two options (both of which involve raising the amount of maximum taxable earnings).
Option 1: Eliminate Minimum Wage
Option one is to completely eliminate the maximum wage base. If you make a million dollars you should pay social security taxes on that full million.
Option 2: Have A Gap On Taxable Income
The other option is to have a gap where the current maximum would stay in place and if earnings would have to exceed a certain level for the tax to become applicable again.
The amounts we’ll examine today is where the tax kicks back in at 250,000 as Bernie Sanders has suggested, 300,000 and 400,000. But one of the big conundrums that the increased taxes brings up is, if the cap is modified, do the increased taxes add to a social security benefit.
For example, if my current benefit at full retirement age is $2,500 but I begin having to pay additional taxes for social security do I get credit for that? Will my eventual benefit increase?
There’s been a few suggestions around this but its mostly split between not giving any credit for the additional taxes and an approach that would use a new formula to credit a small part of the taxes to a benefit. Those are the scenarios I want to look at.
What If Scenarios
First, lets look at the most obvious and clear cut method. What if the taxable base is completely eliminated? If there is no credit given to benefits, and those tax dollars paid in have no benefit returned, it would fix 83% of the 75 year shortfall.
If the current formula is used, which it wont be, this would fix 68% of the shortfall. If they use the new formula, which would credit the increased taxes to your benefit at a 2-3% rate, it would fix 76% of the shortfall.
If they use the threshold or gap method you’ll see similar results. If the tax kicks back in at $250,000, this would fix 75% of the shortfall. At $300,000 it would fix 71% and at $400,000, it would eliminate 67% of the shortfall.
Does it seem like something is missing? The closest that any of these get to fixing the shortfall is the method where the taxable wage base is completely eliminated and there would be no credit to his or her future benefit amount.
Is it likely that a social security payroll tax increase will be part of the overall solution? Yes, but by itself it WILL NOT fix the problem. Next time you hear someone shouting that, tell them you know better.
It’s your retirement!
Before we go, I want to thank you for taking the time to get informed. Don’t be one of the people who just float into retirement and hope everything will work out. Sometimes it does, but sometimes a lack of planning can ruin what should be your best years. This is your retirement! Please continue to stay informed!
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Thanks for reading…have a great day.
Question: Do you think the maximum cap should be eliminated? Please let me know in the comments below.