Please ensure Javascript is enabled for purposes of website accessibility

3 Reasons We Aren't Taxing the Rich to Save Social Security

By Sean Williams - Jul 15, 2018 at 7:06AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

The no-frills truth why the most popular Social Security fix hasn't become law.

What once seemed like a long way off is no longer. Social Security's judgment day is rapidly approaching, and senior citizens and future retirees are rightly worried.

For nearly eight decades, Social Security has been making monthly payouts to eligible retired workers. Initially designed as a program to bolster low-income workers for a few years during retirement in the 1940s, Social Security has now come to be relied on by tens of millions of retirees. Data from the Social Security Administration (SSA) finds that more than three out of five aged beneficiaries leans on Social Security to provide at least half of their monthly income.

This reliance on America's most important social program is what's so scary.

A golden key lying atop two Social Security cards.

Image source: Getty Images.

Big changes are under way for Social Security

According to the latest annual Social Security Board of Trustees report, released last month, a major shift is under way with the program. For the first time since the early 1980s, Social Security is on track to pay out more in benefits than it collects in revenue this year. Even though the $1.7 billion net cash outflow might not seem like much, this deficit is expected to significantly grow in size with each passing year, save for a modest retracement in 2019. Based on the intermediate-cost model, $700 billion will disappear from Social Security's coffers between now and 2027, and the entirely of its asset reserves, totaling $2.9 trillion, will be completely exhausted by 2034.

If there is good news to be hatched from this dilemma, it's that the program isn't in danger of going bankrupt. While the depletion of its excess cash would mean no more in the way of interest income, which contributed $85.1 billion of the close to $1 trillion collected in revenue in 2017, the 12.4% payroll tax on wage income of up to $128,400 (as of 2018), and to a far lesser extent the taxation of benefits, will continue to provide revenue that the SSA can disburse to eligible beneficiaries.

The downside being that the current payout schedule isn't sustainable. The Trustees have forecast the need to reduce benefits for current and future retirees by as much as 21%. In doing so, it's believed that no further cuts would be needed prior to the year 2092. Nevertheless, it's a massive cut for a heavily reliant number of seniors to absorb.

Two Social Security cards lying atop a W2, highlighting payroll taxes paid.

Image source: Getty Images.

America's preferred Social Security "fix"

Essentially, it's up to Congress to figure out a way to "fix" Social Security by eliminating its $13.2 trillion cash shortfall between 2034 and 2092. It could do that by raising revenue, reducing expenditures, or via a combination of raising revenue and reducing expenditures.

But if you ask the American public, the clear-as-day solution is that of raising or eliminating the maximum earnings tax cap -- this is the noted $128,400 cap associated with the payroll tax. Since more than 90% of working Americans earn less than $128,400 a year, they're required to pay into Social Security on every cent they earn.

Meanwhile, the wealthy who have wage income in excess of $128,400 could see some or all of their earned income exempted from the payroll tax. By eliminating or raising this cap, it would raise revenue for Social Security while only impacting a small percentage of the working population. Effectively, it would have no impact on more than 90% of today's workers. What's more, the belief is that the well-to-do can afford to pay more taxes since they're liable to be less reliant on Social Security when they retire.

An informal online survey by The Washington Post and Center for Retirement Research at Boston College in 2014 offered 12 solutions (six to raise revenue, and six to cut benefits) to fix Social Security, and asked readers to check the box next to each solution they would support. The only solution to garner more than 50% of the vote was to "tax higher earnings" by raising or eliminating the maximum taxable earnings cap. 

A man in a suit scowling.

Image source: Getty Images.

Three real-world reasons taxing the rich to save Social Security hasn't happened

This proposal, most often touted by Democrats on Capitol Hill, is the most popular with the public. So why haven't lawmakers implemented it? Keeping in mind that I'm providing an objective, non-partisan overview (i.e., don't shoot the messenger), here are three valid reasons.

1. Taxing the rich isn't fair

To begin with, requiring the well-to-do to pay extra into Social Security wouldn't exactly be fair, even if they could afford to do so.

The reason the maximum taxable earnings cap of $128,400 exists in 2018 is because there's a maximum retirement benefit payable by the SSA at full retirement age of $2,788 a month. Whether you make $1,000 a year above this maximum taxable cap, which changes in step with the National Average Wage Index, or $1,000,000 a year above it, the most you could earn in 2018 from the SSA is $2,788 a month at full retirement age. This means that lifting or eliminating the cap could require the well-to-do to pay significantly more into the system without receiving one red cent of extra benefits. Even if the rich could afford to do so, it's not fair. 

Then again, this resolution highlights a grim reality of fixing Social Security: someone is going to lose. Regardless of what solution is implemented by lawmakers, not everyone is going to come out a winner.

A Democrat donkey and a Republican elephant having a stare-down while standing on the American flag.

Image source: Getty Images.

2. Republicans believe they have the better plan

Another problem with taxing the rich is that any amendment(s) to Social Security will require 60 votes in the Senate to pass. With it being four decades since either political party has had a supermajority in the Senate, this means the need for bipartisan cooperation which, frankly, hasn't happened with Social Security in a long time.

The issue is that Democrats and Republicans each have a solution that resolves the $13.2 trillion cash shortfall, and as a result, neither party is willing to back down from their position and find a middle ground.

Whereas Democrats prefer raising or eliminating the maximum taxable earnings cap, Republicans would like to gradually raise the full retirement age, or the age at which you become eligible for 100% of your payout, as determined by your birth year. Raising the full retirement age from age 67 by 2022 to between age 68 and 70 would require future retirees to either wait longer to receive their full benefit, or to accept a steeper reduction if they claim early. Regardless of their choice, it would save the program money over the long run and resolve the aforementioned cash shortfall.

Call it political hubris or downright stubbornness, but the inability of our nation's two parties to work together has ensured that taxing the rich isn't a viable solution.

A man holding a stack of hundred dollar bills behind his back in one hand, with his fingers crossed in the other hand.

Image source: Getty Images.

3. It could compromise campaign financing

Finally, I'd suggest that well-to-do Americans who play a key role in funding political campaigns may be partly responsible for keeping this legislation off of the table.

According to a blog post from, in 2014, just shy of 32,000 donors accounted for $1.18 billion in aggregate disclosed political contributions. If the payroll tax cap were eliminated, it would directly expose these wealthier campaign contributors to higher rates of taxation. That, in turn, could mean these individuals pulling their support (and funding) for candidates who are in favor of eliminating the payroll tax cap. Essentially, these big donors could be influencing Washington's agenda with their wallets. 

Ultimately, Social Security reform, no matter what shape it takes, isn't going to be possible without bipartisan support. Until partisan hubris is cast aside, any fix for Social Security is going to be a long shot to pass, at best.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning service.

Stock Advisor Returns
S&P 500 Returns

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 05/18/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.