Vermont Senator and Democratic presidential candidate Bernie Sanders (I-Vt.) once referred to Social Security as our nation's most successful social program. And he's absolutely right.

Since its inception in 1935, and the first payout in 1940, Social Security has consistently helped to keep retired workers above water. Today, more than 15 million retirees are lifted above the federal poverty line as a direct result of their monthly Social Security benefit, with an estimated 62% receiving half of their income from the program.

It's also been a vital program with regard to providing income to the long-term disabled, as well as the survivors of deceased workers (spouses and young children). When combined with retired workers, more than 22 million of the 63.6 million people receiving a Social Security benefit are being pulled out of poverty because of their guaranteed monthly payout.

Two Social Security cards partially covering a one hundred dollar bill.

Image source: Getty Images.

Here's what makes Social Security tick

Making this program possible are Social Security's three sources of income:

  • the 12.4% payroll tax on earned income;
  • the interest income earned on the program's asset reserves; and
  • the taxation of benefits

Working in reverse, the taxation of benefits -- yes, Social Security benefits may be taxed at the federal and state level -- provided the program with $35 billion of the just over $1 trillion collected last year. Signed into law in 1983, and expanded in 1993, the taxation of benefits allows the federal government to tax a portion of Social Security benefits if an individual's modified adjusted gross income (MAGI) plus one-half of benefits exceeds $25,000. For couples filing jointly, the tax kicks in when MAGI plus one-half of benefits tops $32,000.

Next up is the interest income the program earns on its asset reserves, which totaled $83.3 billion last year. These asset reserves represent the cumulative net-cash surpluses the program has built up since its inception. By law, these surpluses are invested in special-issue government bonds and certificates of indebtedness, all of which bear various yields and maturities. Thus, when you hear folks griping about the federal government "putting back the money they stole with interest," tell them that the federal government is already paying interest on the money they're borrowing, and none of it is "stolen."

However, Social Security's workhorse is the 12.4% payroll tax on earned income (i.e., salary and wages, but not investment income). Last year, $885.1 billion, or more than 88% of collected income, was the result of the payroll tax on earned income. Also, take note that if you work for a company or someone else, your employer covers half of your payroll tax liability (6.2%). That means most workers are paying 6.2% of their earnings into Social Security, with their company covering the other half of their liability.

Berkshire Hathaway CEO Warren Buffett at his company's annual stockholder meeting.

Berkshire Hathaway CEO Warren Buffett at his company's annual stockholder meeting. Image source: The Motley Fool.

Here's how much Warren Buffett will pay into Social Security in 2019

However, there's a bit of a caveat when it comes to the payroll tax, and it has most working Americans none too happy.

The 12.4% payroll tax on earned income applies to earnings of between $0.01 and $132,900, as of 2019. This $132,900 figure is known as the payroll tax earnings cap, and it adjusts upwards each year in step with the National Average Wage Index. Since more than 9 out of 10 working Americans make less than $132,900 each year, it means they'll be paying into Social Security on every dollar they earn. Meanwhile, income above $132,900 is exempted from the payroll tax, which in 2016 allowed approximately $1.2 trillion in earnings to escape the payroll tax.

As an example, the greatest investor or our generation, Warren Buffett, has generated most of his net wealth from investment income, which is exempted from the payroll tax altogether. Buffett does, however, pull down an annual salary at Berkshire Hathaway of $100,000 a year, and has other forms of compensation he receives. This suggests that Buffett's earned income hits the maximum taxable earnings cap each and every year, resulting in an aggregate tax paid in 2019 of $16,479.60.

And Warren Buffett isn't alone. Pretty much every wealthy individual is going to be capped at this same Social Security payroll tax liability of $16,479.60 in 2019. President Donald Trump, superstar athletes such as LeBron James, high-ranking CEOs, and celebrities are all going to owe no more than $16,479.60 in Social Security payroll taxes this year, even if they were to earn tens of millions of dollars.

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

Image source: Getty Images.

The big debate: To raise the payroll tax cap or not?

This earnings cap is a source of contention among the questions surrounding the long-term health of the Social Security program. Namely, with the Board of Trustees forecasting a $13.9 trillion cash shortfall between 2035 and 2093 and the program needing new sources of revenue, the idea of raising or eliminating the tax cap, such that high-income-earners pay more into Social Security each year, has frequently been put on the table.

On one hand, the idea makes perfect sense. We've witnessed a higher percentage of earnings escaping the payroll tax over time, so this would ensure an immediate uptick in revenue for Social Security. It would also be perceived by most workers as leveling out the playing field since, as noted, more than 9 out of 10 workers are taxed on every dollar they earn. Not surprisingly, raising or eliminating the earnings tax cap is the most popular solution among the public to resolve Social Security's imminent cash shortfall.

But there's another side to this story. The reason the payroll tax earnings cap exists is because the Social Security Administration also limits how much a retired worker can receive each month at full retirement age. In 2019, for example, the maximum benefit at full retirement age is $2,861 a month, regardless of whether you made $150,000 a year throughout your lifetime or $50 million annually. The earnings tax is capped because the amount being paid as a benefit is also capped.

Thus, we have our dilemma. The program needs new sources of revenue to combat an impending cash shortfall, but the well-to-do are already paying their fair share into the program. Suffice it to say that coming to a consensus on Social Security's payroll tax dilemma isn't going to be easy.