Social Security might seem fair. It offers all Americans the chance to contribute to a program that will help support them in old age -- with the average annual benefit recently amounting to $16,000. It requires just about every worker to participate. To some degree, it lets you choose when you want to start collecting benefits (a decision that influences how big your checks will be). Despite all that, Social Security is not quite as fair as it could be -- and some people are, largely unwittingly, pushing for additional unfairness.
Let's back up first, though, and review a few ways in which Social Security is unfair:
1. It doesn't serve all couples and single people equally well
Married Americans can take advantage of spousal benefits (even when divorced) and survivor benefits, and can coordinate when they take their benefits to maximize effect. Single-income couples get back more of what they put into the system, though, than do two-income couples.
2. It double-taxes some beneficiaries
Remember that Social Security is based on a tax to begin with: People pay Federal Insurance Contributions Act, or FICA, taxes out of their paychecks. Meanwhile, some benefits get taxed, too. Thus, income is taxed when earned, and then sometimes again when it's returned in the form of Social Security benefits.
3. It favors lower-income workers in some ways
Lower-income workers get more of their Social Security taxes back as benefits than higher-income workers do. According to the Center on Budget Policy and Priorities: "Benefits for someone who earned about 45 percent of the average wage and then retired at age 65 in 2015 replace about 52% of his or her prior earnings. But benefits for a person who always earned the maximum taxable amount replace only about 25% of his or her prior earnings, though they are larger in dollar terms than those for the lower-wage worker." This can seem unfair, but it reflects a "progressive" design, where higher-income people pay more, proportionally, than lower-income folks. Supporters of such systems will point out that wealthier people need these benefits far less than poorer people do.
4. It favors higher-income workers in some ways
High earners pay a smaller percentage of their income in Social Security taxes than do lower-income and middle-class workers. The tax for Social Security on your income is 6.2% each for you and your employer, for a total of 12.4% -- with self-employed workers paying the entire tax themselves. On a base of $100,000, the tax would amount to $12,400. You might expect that someone earning $1,000,000 would pay $124,000 in FICA taxes, right? But, no. The taxable income on which we're all taxed for Social Security is capped -- at $118,500 for 2015. So in 2015, the person earning $1 million pays no tax for Social Security on $881,500 of his or her income, while someone squeaking by on $25,000 is taxed on all of it.
4. The coming crisis -- and some fair and unfair proposals
There's a big problem looming: The Social Security trust funds are headed toward insolvency in the 2030s, at which point benefits may be reduced. That's a big deal, because nine out of 10 Americans aged 65 and older collect Social Security, with 22% of elderly married couples and 47% of single elderly people relying on it for at least 90% of their income.
To address this anticipated shortfall and avoid unpleasant consequences, many reforms and fixes for the system have been suggested. One aims to make things fairer, by removing the income cap and taxing all of each worker's income. That way, the millionaires would be taxed on all they earn, just as poorer workers would be.
Another suggested fix is less fair: raising the retirement age at which workers would normally start collecting benefits. It used to be 65 and has already been hiked to 66 and 67 for workers born in more recent years. Advocates of further increases point to longer life expectancies for Americans. A closer look at that, though, reveals the fix to be problematic. You see, America not only suffers from wealth inequality, but also lifespan inequality. A recent report based on census data shows that if you break out life expectancies by wealth, the wealthy are expected to live much longer. That means that above-average earners are already benefiting from Social Security longer than below-average earners. And upping the age at which people are expected to retire will shorten the expected retirements of the poor dramatically.
For example, the life expectancy for 50-year-olds in 2010 was 88.8 years for those in the highest income quintile, and just 76.1 years for those in the lowest. That's a difference of almost 13 years! Someone now set to retire at 67 might expect to live only nine more years if they're in the lowest quintile, and almost 22 years if they're in the highest. That's quite a difference and raising the retirement age will make the scenario bleaker and less fair for low-earners.
While the Social Security system is imperfect -- and seemingly unfair in various ways -- it's still a critical social program, arguably benefiting more people than any other. More fairness in the system would be welcome, though, as would reforms to bolster it. In the meantime, we would all do well to learn more about strategies we might employ to maximize our benefits.
Longtime Fool specialist Selena Maranjian, whom you can follow on Twitter, has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.