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Are the Rich Killing Social Security?

By Sean Williams - Updated Jan 10, 2019 at 2:17PM

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An estimated $1.2 trillion in earnings was exempted from the payroll tax in 2016.

Social Security is our country's most important social program. It's also a program that has a worrisome and uncertain future.

According to the latest Social Security Board of Trustees report, released this past June, the program that's currently paying out benefits to nearly 63 million people, of which roughly 70% are retired workers, was set to expend more than it collects in 2018. The last time Social Security endured a net cash outflow was 1982, the year before the Reagan administration passed the last major overhaul of the program.

However, this forecasted $1.7 billion net cash outflow in 2018 is simply a precursor for bigger problems to come. Beginning in 2020, every year is expected to bring a significant jump in net cash outflow as a result of ongoing demographic changes. Social Security might appear perfectly fine with close to $2.9 trillion in asset reserves in its coffers right now, but the existing path the program is on would completely exhaust this excess cash by 2034. Should this happen, then-current and future beneficiaries would be subject to an across-the-board reduction in their monthly payouts of up to 21%. Note that Social Security won't go bankrupt, but those people who are heavily reliant on the program would certainly feel this benefit cut.

A half-dozen Social Security cards messily stacked on top of each other.

Image source: Getty Images.

Social Security has problems, but boomers aren't to blame

What's to blame for Social Security's problems? A lot of finger-pointing is typically given to baby boomers who are guilty of nothing other than being born during a time of heightened fertility rates.

But boomers are far from the only reason Social Security is struggling. Increased longevity and the inaction of the federal government are two examples of factors that deserve far more finger-pointing than boomers. With people living longer, they're able to pull in a benefit for perhaps two-plus decades from a program that was initially designed in the 1930s to be a financial foundation for years, not decades. As for the federal government, the longer it waits to act, the more painful the fix will be on American workers.

Are the wealthy responsible for Social Security's woes?

Another factor that generally flies under the radar, but that is nevertheless very much responsible for Social Security's issues, is growing income inequality. In 2016, the Social Security Administration found that $1.2 trillion in earned income was exempt from the 12.4% payroll tax, which, in 2019, is capped at $132,900. In plainer terms, it means that more than 90% of working Americans (i.e., those making less than $132,900 a year) are paying into Social Security with every dollar they earn. Meanwhile, the remaining percentage of well-to-do workers are being exempted on every dollar earned above $132,900.

As you can imagine, that's a lot of money escaping the Social Security program, and it's raised the idea that the rich are actually what's killing Social Security. But is this the case? The answer is both yes and no.

A smiling businessman in a suit lying atop a bed of cash bills.

Image source: Getty Images.

To blame the rich...

What's very much true is that income inequality is a big problem. Earnings for wealthy Americans have been growing considerably faster than for middle-income and lower-income workers for decades. Since earnings over the payroll tax cap are exempted, it's resulting in more money escaping taxation over time. Back in 1984, 88.6% of all earnings were subject to the payroll tax. In 2016, it was just 82.7%. Although the taxable earnings base has grown between 1984 and 2016, the exempted amount has grown even faster, from $300 billion to the noted $1.2 trillion

Income inequality also manifests in the longevity discussion. Wealthier Americans presumably have little or no financial barriers to receiving preventative medical care and prescription medicines. The same isn't necessarily true for folks in the middle- and lower-income classes. This improved access to medical care has created a notable life expectancy gap between the rich and poor. And since the well-to-do have earned more throughout their lifetime, Social Security is responsible for paying them a higher monthly payout for an extended period of time.

In some ways, yes, the rich appear to be responsible for killing Social Security.

An annoyed senior man in a suit with a scowl on his face.

Image source: Getty Images.

... or not to blame the rich

Then again, the well-to-do don't shoulder the blame for this country's fiscal policy and congressional inaction. The payroll tax cap could be raised with bipartisan support in Congress, but getting to the needed 60 votes of support to pass Social Security amendments in the Senate hasn't come to fruition. In fact, Democrats and Republican aren't even close on how to fix Social Security, with the two parties approaching a resolution from complete opposite ends of the spectrum.

In other words, the wealthy aren't purposefully out to weaken Social Security. They're simply able to take advantage of faster earnings growth, the lack of universal healthcare in the U.S., and relatively slow increases in the payroll tax cap, which is tied to the National Average Wage Index. Put this way, it's not the fault of the rich.

The one thing that is clear is that if Social Security is going to be fixed for future generations, lawmakers will have to tackle the problem of growing income inequality. No Social Security solution has staying power if it doesn't address the declining taxable ratio. Period.

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