Though Social Security and Medicare are both vital programs that provide a financial foundation for seniors in retirement, it's arguably Social Security that's currently the more important of the two for the average American.
According to an Urban Institute study that examined the estimated lifetime benefits of Social Security and Medicare for an average-earning male ($47,800 salary in 2015 dollars), lifetime Social Security benefits ($294,000) are expected to top lifetime Medicare benefits ($195,000), net of premiums, by $99,000.
Social Security may soon be in free fall
Unfortunately, this top-tier social program is also in serious trouble. According to the Social Security Board of Trustees' 2017 report, the program will begin paying out more in benefits than it's generating in revenue beginning in 2022. By 2034, some $3 trillion in asset reserves will be completely exhausted.
The silver lining for seniors is that Social Security won't be going bankrupt, even if its excess cash is depleted, thanks to the way the program is funded. Payroll taxes on earned income accounted for 87.3% of the $957.5 billion that Social Security collected in revenue in 2016, meaning that as long as Americans continue to work and pay their taxes, Social Security will keep bringing in revenue that can be doled out to eligible beneficiaries.
However, that doesn't mean the current payout schedule is sustainable. The Trustees opine that an across-the-board cut in benefits of up to 23% may be needed to sustain payouts to beneficiaries through the year 2091. Considering that more than three in five seniors are leaning on Social Security for at least half of their monthly income, a possible 23% cut to benefits is deeply concerning.
Should the rich pay more into Social Security?
Congress essentially has two paths it can take to "fix" Social Security: raise revenue or cut benefits. But if you ask the public, the answer is simple. According to a variety of surveys, a majority of the public want the rich pay more into Social Security. For those unaware, the 12.4% payroll tax applies to earned income between $0.01 and $127,200 as of 2017. This means any earned income above $127,200 is free and clear of Social Security's payroll tax.
The question is: Should the wealthy be required to pay more? Let's have a look at both sides of the argument.
Hands down, the wealthy should pay more
There are three compelling arguments why the rich should be paying more into the program.
To begin with, raising the maximum taxable earnings cap (the aforementioned $127,200 figure) would only affect about one in 10 workers. Roughly 90% of working Americans makes less than the maximum taxable earnings cap each year, meaning they're paying into Social Security on every dollar they earn. These folks are liable to favor any legislation that requires well-to-do workers to share their fate.
Second, and perhaps the most compelling argument, is that lifting the payroll tax earnings cap or removing it entirely could eliminate a majority or all of the $12.5 trillion budget gap in Social Security between 2034 and 2091. You heard that right: No benefit cuts are likely if all earned income were taxed.
The third reason to support taxing the rich more is that they're unlikely to need Social Security payments when they retire. This isn't to say the rich are necessarily better at saving money than the average American, so much as to suggest that they're likelier to have secondary and tertiary income sources once retired, which isn't always the case with low-income and average-earning folks. For the rich, Social Security might be a vacation piggy bank or a completely unneeded source of income during retirement.
No way! The rich already pay their fair share
Yet, there's another side to this story. Let's now take a look at why the well-to-do are already paying their fair share.
The most compelling argument against legislation that would require the wealthy to pay more is that the maximum taxable earnings cap serves a purpose. It's there because Social Security has a maximum monthly payout of $2,687 (as of 2017) for persons at full retirement age. In other words, it doesn't make sense to tax a wealthy individual up to say $5 million in earned income if he or she only has the ability to net $2,687 at maximum per month during retirement.
Second, and essentially an extension of the previous point, the rich won't get anything extra out of paying more into Social Security. Even though the maximum taxable earnings cap tends to rise annually with inflation, the increase is small compared to the extra tax they could wind up paying.
And finally, I think it should be noted that the wealthy are often some of the largest donors to the campaigns of politicians in Washington, and raising payroll tax limits that could allow them to be taxed more heavily may not sit well with those donors. In effect, there's a large disincentive for Congress to make this move, as it could cost them their seats on Capitol Hill.
Now that you better understand both sides of the argument, do you believe the rich should pay more in Social Security tax?