Social Security is undeniably our nation's most valuable social program. But it has a problem -- a very big problem.
According to the newest report from the Social Security Board of Trustees, the program responsible for keeping in excess of 22 million people out of poverty each year has a $13.9 trillion cash shortfall in its future. And this shortfall has grown by $700 billion in each of the past two years.
A number of ongoing demographic changes and Congress' failure to take action have Social Security on course to completely exhaust its asset reserves -- i.e., its aggregate net-cash surpluses since inception -- by 2035. If and when this extra capital is depleted, retired workers and future retirees could find their benefits cut by up to 23%. That's a pretty sizable concern when you take into account that more than 3 out of 5 retirees currently lean on Social Security for at least half of their income.
With the figures pretty well spelled out by the Trustees report, it's up to Congress to take action to fix it. The question remains, "How?"
Raising or eliminating the payroll tax cap is the most popular Social Security solution
If our elected officials were to approach fixing Social Security by following public opinion, the solution to the program's issues would be to raise or eliminate the maximum taxable earnings cap.
Social Security's workhorse revenue generator is the 12.4% payroll tax applied to earned income. This includes wages and salary but exempts all forms of investment income. In 2019, earned income between $0.01 and $132,900 is subjected to the 12.4% payroll tax. Keep in mind that only the self-employed and self-proprietors pay the full 12.4% rate, with employees of a company splitting their payroll tax liability with their employer (6.2% each).
In 2018, the payroll tax led to the collection of $885 billion in revenue, which is more than 88% of the $1 trillion brought in by Social Security. Yet somewhere around $150 billion in payroll tax revenue "escaped" the system, because all earned income above $132,900 is exempt from the tax. In effect, it allows the well-to-do to avoid the payroll tax on some or most of their income. Between 1983 and 2016, the amount of earned income exempt from the payroll tax rose from north of $300 billion to about $1.2 trillion.
The solution, according to the public, is simple: increase or remove the maximum taxable earnings cap. This would require the rich to pay more into the system, thereby leveling the playing field, so to speak, on the more than 90% of workers who don't make more than $132,900 a year and are therefore paying into Social Security on every dollar they earn. It would also be an immediate shot in the arm of revenue for what looks to be an ailing Social Security program.
Unpopular opinion alert: The rich are already paying their fair share
Although this may sound like a perfectly logical solution, I'm going to offer up and defend a highly unpopular opinion -- namely, that the rich are already paying their fair share into Social Security. While I don't deny that the percentage of earned income "escaping" the payroll tax has increased in recent decades, there are two factors that should make lawmakers hesitant to approach fixing Social Security as a "tax-the-rich" strategy.
To begin with, there's a reason the payroll tax cap exists in the first place; it isn't just plucked out of the air by the Social Security Administration each year. Rather, the maximum taxable earnings cap exists because there's also a cap on the amount retired workers can be paid each month at full retirement age ($2,861 in 2019). This means that it doesn't matter whether you earned an average of $150,000 a year throughout your life or $10 million a year, the most you could be paid by Social Security in 2019 at full retirement age is $2,861 per month. The payroll tax cap exists because a maximum retired worker benefit amount also exists.
The second factor to consider is that what workers put into the program isn't necessarily what they get out of the program -- and I'll lean on an analysis from Urban Institute to prove it.
The 2018 update from the Urban Institutes' Social Security and Medicare Lifetime Benefits and Taxes report examined past and future income and liability for a variety of income scenarios. A single man with earned income equal to the maximum taxable earnings cap -- Urban Institute differs between men and women in its report due to their varied average life expectancies -- can expect to pay $710,000 in lifetime Social Security taxes by 2020, assuming he turns age 65 in 2020. Comparatively, this same individual will only receive $512,000 in lifetime benefits from the program. That's nearly $200,000 more put into the program than this well-to-do individual will receive.
Conversely, a single man earning $23,400 in 2018, which is considered low earnings by Urban Institute, would pay $135,000 over his lifetime into Social Security by 2020 but would net an expected $193,000 over his lifetime from the program. That's $58,000 more received than what was put in.
In other words, the program is working as intended, and the rich would appear to be already paying their fair share.
Now, don't get me wrong. I do believe that the most effective way to tackle Social Security's cash shortfall is with a bipartisan approach that cuts long-term expenditures and raises additional revenue. However, these additional revenue raises probably should not come entirely from the rich, who are paying their fair share.
Suffice it to say that Social Security's most popular fix isn't the cut-and-dried issue it appears to be.