No one enjoys paying taxes, but the American public also understands that paying tax is what helps fund federal, state, and local government, as well as supports local and broad-based social programs — arguably none of which is more important than Social Security.
Despite its well-documented problems, one thing the American public doesn’t have to worry about is Social Security going bankrupt. Even if the worst should happen and Social Security completely exhausts the $2.9 trillion in asset reserves that have been built up since its inception, the program would be able to lean on its remaining sources of recurring revenue to provide income for eligible beneficiaries. This includes the taxation of Social Security benefits for individuals and couples earning over a certain income threshold and the workhorse of the program, the 12.4% payroll tax on earned income.
In 2017, the payroll tax brought in $873.6 billion out of the $996.6 billion collected for Social Security. In the years that lie ahead, its importance could grow further as interest income from asset reserves declines. But this prime source of income for Social Security is also a major sore spot for much of the public.
President Trump speaking in Springfield, Missouri. Image source: Official White House Photo by Joyce N. Boghosian.
President Trump is a perfect example of Social Security’s shortcomings
You see, payroll tax applies to all earned income (i.e., wages or salary you’re paid) between $0.01 and $132,900 (as of 2019). This “cap” rises annually with the National Average Wage Index (NAWI). If, for example, the NAWI rises 3.5% year over year, then the earnings tax cap will increase 3.5% in the upcoming year. More than 9 out of 10 working Americans will earn less than $132,900 in 2019, which means they’ll have the payroll tax applied to every single dollar they earn.
Meanwhile, a single-digit percentage of the working population will earn more than $132,900 in 2019. Although they’ll owe their portion of the payroll tax up to $132,900, all earned income above and beyond this amount is exempt. For some folks, this might represent a small amount of their earned income. But if you earn $266,000 or more, a majority of your income will be exempted from the payroll tax.
Billionaire President Donald Trump is a perfect example of everything the working public dislikes about the current scope of Social Security’s payroll tax. Aside from earning $400,000 as salary for being president, financial disclosures filed by Trump suggest that he earns in the neighborhood of $600 million annually, primarily from his employment assets. That works out to $1.64 million a day, close to $68,500 an hour or 1,141.55 a minute in estimated earnings. At this pace, it would take President Trump just 117 minutes — less than two hours — to hit the payroll tax earnings cap. In other words, Trump was probably done paying into the system before 2 a.m. on New Year’s Day.
Image source: Getty Images.
If that were not enough, keep in mind that only earned income is subject to the payroll tax. This means investment income, rental income, and multiple other sources of income, most often taken advantage of by the well-to-do, are exempt.
According to an analysis from the Social Security Administration, between 1984 and 2016, the amount of earnings exempted from the payroll tax has quadrupled from about $300 billion to $1.2 trillion. At a tax rate of 12.4%, that $1.2 trillion represents close to $150 billion in lost revenue for the program.
Why aren’t we taxing the rich?
Not surprisingly, the public’s favorite solution to fix Social Security’s imminent cash shortfall is to raise or eliminate the payroll tax cap. An informal online survey back in 2014 from the Washington Post showed favorability at around 70% for raising the cap, with none of the other 11 options presented receiving more than 45% of the vote (respondents could choose as many of the options as they were willing to stand behind).
Quite a few lawmakers in Washington have proposed Social Security reform bills that aim to collect more revenue from the rich. House Rep. John Larson’s, D-Ct., Social Security 2100 Act would create a donut hole between $132,900 and $400,000, then reinstitute the 12.4% payroll tax on earned income above $400,000. Meanwhile, Bernie Sanders, I-Vt., has called for a donut hole up to $250,000, with the payroll tax again applying to earned income above $250,000.
In other words, the calls for action are out there. So why, exactly, aren’t the rich being taxed at a higher rate and “paying their fair share” like every other working American?
Image source: Getty Images.
One reason a payroll tax cap exists is because a maximum benefit at full retirement age exists, too. Just as the Social Security Administration adjusts the payroll tax cap in step with the NAWI, the maximum possible benefit at full retirement age is adjusted annually as well. In 2019, the maximum monthly benefit at full retirement age is $2,861. It wouldn’t make any logistical sense for Trump to pay 12.4% on $600 million in earnings (hypothetically assuming it’s all earned income) if his maximum possible benefit is capped at less than $2,900 a month. The payroll tax cap exists because a monthly benefit cap exists. Plain and simple.
Another problem is that in order to make changes to Social Security, you’ll almost always need both parties to play nice — which, let’s face it, never happens anymore. It takes 60 votes in the Senate to amend Social Security, and since neither party has had a supermajority in four decades, this means bipartisan support is needed. However, a majority of Republicans are vehemently opposed to increasing or removing the tax cap, killing any chance of reform.
As much as the working public may dislike the current setup, there’s little evidence to suggest that it’s going to change anytime soon.