New research shows that the proportion of wages that were subject to Social Security taxes hit a record low in 2021, as income inequality has skyrocketed and those receiving the highest incomes are paying proportionally even less into Social Security funds.
According to a new analysis by the Economic Policy Institute (EPI), the share of earnings subject to the tax hit its lowest level in nearly 50 years, since before reforms lengthened the solvency of the program. Only 81.4 percent of wages were subject to Social Security taxes in 2021 – far below the threshold of 90 percent of wages subject to the tax as set by the reforms in 1983.
The proportion of wages subject to the tax have slowly fallen since that peak in 1983, and the last time that the share of Social Security Administration (SSA)-taxed wages was close to 80 percent was in 2007, the year the Great Recession began, when it hit 82.6 percent.
The reason that the proportion is so low now, EPI writes, is due to income inequality, which has grown much worse over the past decades.
In 2021, people stopped paying into Social Security when they hit $142,000 in income in one year – meaning that someone making $1 million a year stopped paying into Social Security by the end of February, while those making less than $142,000 a year paid into it all year.
This cap adjusts with the average wage, as measured by the SSA. But wages for the average working class American have stagnated while income increases for the richest Americans have far outpaced those of the average American. Another recent analysis by EPI found that the top 1 percent saw their incomes increase by 9.4 percent and the top 0.1 percent saw increases of 18.5 percent between 2020 and 2021, while the bottom 90 percent saw their real earnings fall by 0.2 percent.
This means that those at the top are enjoying even more wages above the Social Security tax cap that aren’t subject to the 6.2 percent tax, while the average worker takes home even less.
Workers, then, are experiencing a hit from both sides: They are paying a larger share of their wages into Social Security than the richest Americans, with 100 percent of the average workers’ wages subject to the tax, even as their wages decline.
Further, the working class will bear the brunt of the expected cuts to Social Security benefits that are likely to happen in the coming decades, in part as a result of the rich paying proportionately less into the program. The program is slated to stop being able to pay out full payments by the mid-2030s, and Republicans are currently maneuvering to pass legislation to cut Social Security even further so that the average worker will have to work much longer past the typical retirement age.
EPI suggests several approaches to solving this problem, saying that lawmakers could take steps to tackle wage inequality and support workers by strengthening labor laws. A simple reform could be for lawmakers to change the way that the tax cap is calculated to prevent further erosion of the SSA’s finances.
Lawmakers have another solution, as EPI points out: “scrapping the cap” altogether to level the playing field. Sen. Bernie Sanders (I-Vermont) has long advocated for this solution, and last year introduced a bill that would ensure that all earners pay into the program all year, regardless of income. This would allow the program to pay out $2,400 more a year, which could go a long way toward reducing poverty among elderly people, and would fully fund the program until 2096.
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