Social Security is largely funded by payroll taxes. When you work, a portion of your income is allocated to Social Security, up to a certain dollar amount.
Currently, 12.4% of workers' earnings go toward Social Security taxes. Those who are employed by an outside company pay half that amount -- 6.2% -- while their employers pay the remaining 6.2%. Self-employed workers, meanwhile, pay the entire 12.4% themselves, and the fact that they do might seem unfair -- but perhaps not nearly as unfair as the fact that millionaires pay the same amount of annual Social Security tax as moderate earners who by no means consider themselves rich.
Social Security's wage cap
The 12.4% Social Security tax you pay on your wages only applies to earnings up to a certain threshold. That earnings cap changes from year to year. For 2019, it's $132,900. In 2020, it's climbing to $137,700. Beyond that point, however, annual Social Security taxes look the same, regardless of whether you're bringing home an annual income of $138,000 (not a huge salary for someone living in an expensive part of the country) or an income of $17 million.
All told, the maximum amount of Social Security tax you'll pay on your earnings in 2020 is $17,074.80. If you work for an employer, you'll pay half that amount -- $8,537.40. If you're self-employed, you'll pay the whole $17,074.80, though you can deduct half of that sum on your tax return.
Not shockingly, some lawmakers are eager to raise or completely eliminate the Social Security wage cap to not only make the system fairer, but help address the program's impending financial shortfall. The Social Security Trustees estimate that the program may need to slash benefits by as much as 20% beginning in 2035 due to a lack of incoming revenue. Raising the payroll cap would therefore help address that concern.
But let's remember that, while it may seem outrageous that millionaires pay the same annual Social Security tax as moderate earners, they're also limited to the same maximum monthly benefit during retirement. The figure changes from year to year, but in 2020, it's $3,011 per month for a worker claiming benefits at full retirement age. In other words, there's not just a cap on taxable wages -- there's a cap on benefits. And if we raise the first cap, it's only fair that we raise the second cap, which, in turn, doesn't do much to increase Social Security's cash flow.
You might argue that really wealthy people don't need Social Security in retirement, and as such, don't need higher benefits to compensate for a higher payroll cap. The former may be true, but let's think about whether that's actually fair to the rich and whether that's likely to sit well with them.
Ultra-wealthy Americans might make up just a small percentage of the overall U.S. population, but they tend to have a lot of influence, politically speaking. As such, the oft-suggested "raise the payroll cap" solution may not be as easily implemented as you think, which explains why, for the time being, millionaires will continue paying the same amount of annual Social Security tax as their counterparts who earn much less.