The Social Security program paid more than $113 billion in benefits to 66 million Americans in May, and total outlays for the year are expected to reach $1.3 trillion. That makes Social Security the largest line item in the federal budget. Unfortunately, the aging population has created a problem: Costs are rising faster than income.
Social Security operated at a $22 billion loss last year, marking its second consecutive annual deficit, and the program will continue to burn money indefinitely unless changes are made. That puts the Social Security trust fund on pace for depletion by 2033, according to the latest report from the Board of Trustees. If that happens, income from payroll taxes would cover 80% of scheduled benefits in 2033, and that figure would fall to 74% by 2097.
Ultimately, the Social Security program faces a funding shortfall of $22.4 trillion over the next 75 years, and many politicians argue that income inequality bears some of the blame for that problem. But President Joe Biden wants to address income inequality by applying the payroll tax to more earnings. That solution could eliminate a sizable chunk of the long-term funding deficit.
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Why Social Security has an income inequality problem
Social Security is primarily financed through a 12.4% payroll tax, split between employees and employers, up to the maximum taxable earnings limit. The limit currently sits at $160,200, but it rises each year to keep pace with changes in general wage levels. Any income above the limit is not taxed for the purposes of the Social Security program. In other words, someone making $170,000 per year pays the same amount in taxes as someone making $1.7 million per year.
According to the Social Security Administration, roughly 6% of workers have earnings above the maximum taxable limit in any given year. But the total income attributable to those workers is rising, so the percentage of earnings subject to Social Security payroll tax is shrinking. In fact, it reached a 50-year low of 81.4% in 2021, meaning 18.6% of income was not subject to the Social Security payroll tax.
President Biden wants to extend the Social Security payroll tax to more income
President Biden has repeatedly promised to protect Social Security from benefit cuts, most recently in his 2024 federal budget proposal. While sparse on details, Biden reiterated his commitment to strengthening Social Security by ensuring high-income individuals pay their fair share. One tenet of his reform plan addresses income inequality by extending the 12.4% payroll tax to all income over $400,000.
Doing so would effectively create a donut hole between the current taxable limit ($160,200) and $400,000, but the gap would get smaller and eventually close as the taxable limit rises each year. Eventually, all income would be subject to Social Security payroll tax.
Most American voters agree with President Biden
A recent survey from the University of Maryland says most American voters agree with President Biden. An overwhelming 81% of survey respondents said they support applying Social Security payroll to tax to all wages over $400,000, and that support was bipartisan. The proposal was backed by 79% of Republican respondents and 88% of Democrats.
Should that change become law, the University of Maryland estimates it would eliminate 61% of the long-term funding shortfall. That means other reform measures would be necessary to ensure benefits are fully payable in the future.
