Most people pay a Social Security tax of 6.2 percent on their income throughout the year, on every dollar they earn. But the top 1 percent of working Americans are only taxed during the first six weeks of the year, on a small portion of what they earn. They pay the Social Security tax only on the first $118,500 of income, the amount at which Social Security payments are capped.
That means from this week forward, they are enjoying a payroll tax holiday that lasts through the rest of the year. Is that fair?
Today the Social Security trust fund has about $2.8 trillion. But, by 2033, if nothing is done to increase the amount of money in the trust fund, it will have spent down its assets and will only be able to pay about 75 percent of scheduled benefits. As it is, U.S. benefits are already stingy as compared with those of other wealthy countries.
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According to the Center for Economic Policy and Research (CEPR), one driver of this future shortfall in the Social Security trust fund is the dramatic widening of income gaps in the last three decades. The people earning the highest incomes have seen faster wage increases than other workers. Consequently, more income is escaping tax than originally projected, and the Social Security trust fund has collected less revenue than needed.
The Center for American Progress reports that in 2013 almost 13 percent of total wage income went to the top 1 percent of wage earners, almost as much as went to the entire bottom half of wage earners. Consequently, more income is escaping tax than originally projected, and the Social Security trust fund has collected less revenue than needed.
A simple solution for building up the Social Security trust fund to what we need down the line is to raise the cap to the level originally intended by Congress and President Reagan in 1983, when the current payroll tax formula was set. By so doing, 70-80 percent of the projected trust fund shortfall would vanish.
Based on Census data, CEPR projects that only one in 15 workers would be affected if the Social Security cap were lifted. Only one in 32 women would pay more, and only one in 43 Latinos would pay more.
Lifting the cap is not only fair, it would eliminate the need for benefit cuts or tax increases on the middle class. And a large majority of Americans support it. Isn’t that the right way to shore up Social Security?