Next week, Social Security will celebrate its 85th anniversary since it was enacted into law. Without question, it is America’s top social program, providing benefits to more than 64 million people a month and pulling 22 million of those people out of poverty.
However, it is also a program that has had its biggest crisis since its inception.
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Who is ready for a 24% cut across the board?
Each year, the Social Board of Trustees publishes a report detailing the short-term (10-year) and long-term (75-year) program. In each of the past 35 years, trustees have warned that long-term income would not be enough to cover projected expenses. This is a hefty way of saying that the current payout schedule, including adjusting living expenses, is not sustainable for 75 years after the release of a report.
As time has passed, the unfulfilled obligations of the program have been exaggerated many times. According to the latest report, Social Security is expected to cover a $ 16.8 trillion funding gap between 2035 and 2094. If this deficit is not addressed, retired workers could see their payments fall by 20% by 2035.
How does such a time-tested program suddenly run into a nearly $ 17 trillion speed bull? Look no further than a host of ongoing demographic changes. In addition to visible shifts, such as the retirement of baby boomers and increasing longing, we are seeing other trends, such as growing income inequality, contributing to social security misery.
The question at this point is not whether Social Security is in trouble or not, as it is clear. After all, it’s how legislators repair it?
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Wealth taxes are the preferred fix for social security
If you were to ask the public, the most favorable solution, by a long shot, would be to tax workers on higher incomes.
By 2020, all earned income (ie salary and salary, but not investment income) between $ 0.01 and $ 137,700 will be subject to Social Security tax. This tax service was responsible for generating $ 944.5 billion of the $ 1.06 trillion the program raised in 2019, so it’s incredibly important to Social Security.
The thing to note is that a cap exists at $ 137,700, which means that all income above this level is exempt from tax. Although this maximum taxable income increases almost every year with the percentage increase in the National Average Wage Index, it still allows the rich to avoid the tax service for a portion – or perhaps the lion’s share – of their earned income.
Between 1983 and 2016, the amount of earnings exempt from tax evasion nearly doubled from north $ 300 billion to about $ 1.2 trillion. This has allowed close to $ 150 billion in taxable revenue to ‘escape’ the system on an annual basis in recent years.
The most favorable proposal to affirm social security would see this maximum taxable income cap in its entirety increased or eliminated. The increase often consists in creating a donut gap between, for example, the lower limit of $ 137,700 and $ 250,000 than $ 400,000, where this exemption would remain in place. Taxes would then start again above $ 250,000 or $ 400,000, boosting Social Security’s collected revenues and paying the rich their fair share.
Another factor to consider is that 94% of working Americans are likely to earn less than $ 137,700 by 2020 and therefore pay into Social Security for every dollar they earn. Thus, increasing or eliminating the cap of wage tax revenue would only affect 6% of the workers. Since this change would not affect a large majority of the workers, it is quite popular.
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By itself, taxing the rich is not enough to save Social Security
Unfortunately, there is a harsh reality that has to do with the tax-rich dissertation: It will not save Social Security.
In addition to arguing that the rich are not paying their fair share, there are two major reasons that the high-income earner will not be enough to bridge the Social Security funding gap over the next 75 years.
First off, the well-to-do are more likely to shift how they generate income if the tax rules for Social Security are changed. As indicated, virtually all forms of investment income are exempt from tax. Resetting the payroll tax to $ 250,000 or eliminating it altogether will force the rich to generate more of their income from investments. This will protect additional income from the tax burden and result in less revenue being collected by Social Security than was first anticipated.
Second, but arguably more importantly, wealth taxation does not account for other persistent demographic changes that have a negative impact on Social Security. In no particular order:
- Illegal immigration has fallen: The Social Security program depends on an expected level of younger legal migrants entering the U.S. each year to help offset the number of senior workers who choose to retire and claim their benefits. For the past two decades, the number of legal migrants entering the US has decreased, which will weigh on the ratio of employee-beneficiaries.
- US birth rates are at an all-time low: The Social Security program calculates an average of almost two births per woman in infancy. However, the latest birth rate data show the US at a very low time. If births do not pick up quickly, it will also weigh on the employee-benefit ratio.
- Low-yield / low-inflation environment: For more than a decade, the Federal Reserve has kept its rate of federal funds on historical lows, well below its historical average. For Social Security, which has invested more than $ 2.9 trillion in asset reserves in special-purpose bonds, this means less in the way of interest income.
The point is, even if Social Security can collect more revenue by taxing the rich, the program will only buy a few extra decades of solvency. While I am not saying this is a bad thing, it is important to note that raising taxes on the rich is not a solution that can save Social Security on its own.
