There continues to be some misunderstanding about the solvency of Social Security, including a dire prediction that the program will be bankrupt by 2033. While that’s not true, that date is relevant to understanding where the system stands. Unless there are changes to the system, that is the date that Social Security benefits will be cut for the first time since its inception in 1940. Analysts say at the current rate, benefits will be cut by 21% in eight years.
That’s troubling for all retirees, and especially alarming for the estimated 20% of retirees whose entire income comes from Social Security.
Other myths used to explain the continuing threat to the viability of the Social Security program are that illegal aliens are getting benefits or that Congress is funneling off Social Security funding. Both claims are patently false.
The real threat to Social Security is based primarily on rapidly-changing demographics. There are more and more people retiring and beginning to draw Social Security benefits at a time when our nation’s birth rate is the lowest in history. Retirees are living far longer today than when the first Social Security calculations were made. Fewer workers paying into the program and more retirees drawing funds from the program for a longer period of time. It’s not difficult to see how that would negatively impact Social Security’s balance sheet, which currently has a $24 trillion shortfall.
Income inequality has a major impact on Social Security funding. When the last major reforms to shore up Social Security were implemented in 1983, 90% of taxable income was subject to Social Security tax. Today, only 83% is subject to Social Security tax.
The top earners continue to pay a lower and lower percentage of the Social Security taxes collected. It is a textbook example of a regressive tax.
The maximum taxable income for Social Security for 2025 is $176,100. A worker who makes less than that amount pays 6.2 percent of every dollar he earns to Social Security with his employer matching that 6.2% payment.
Any income over $176,100 is not subject to Social Security withholding. An estimated 94% of Americans never reach that cap, which means they pay 6.2% taxes on everything they earn. For someone who earned $100,000 a year, 6.2% goes to Social Security withholding. By contrast, someone who makes $500,000 per year would only pay 2.2% of their earnings. The higher the income the lower percentage of income goes into the program.
The most effective tool to address this problem should be obvious. Substantially raising the Social Security cap or eliminating it altogether would pump tens of billions of dollars into the program annually. Economists say that wouldn’t be a permanent solution, but it would sustain the current benefits levels for another generation of retirees.
One recent proposal for raising the cap would be to apply the tax to earnings over $400,000 while keeping the current $176,100 cap. The gap between the two would narrow over time as the maximum taxable amount increases and the $400,000 threshold remains unchanged. That gap has earned the nickname donut hole and would serve to gradually increase the program’s revenues over time while not subjecting earners who fall in the gap to immediate tax increases. While estimates vary based on assumed wage trends and the specific details of each proposal, economists project that it would take approximately 20 to 30 years for the donut hole to disappear. Such an approach is intended to make the tax more progressive by increasing the tax burden on higher-income Americans.
Other suggestions such as raising the age that people are eligible for benefits or simply reducing the benefits hurt low and middle income earners. For high earners, eliminating the gap would not materially affect their quality of life.
Adjusting or eliminating the Social Security cap is, by far, the better option.
In the meantime, we need to start making more babies or find other ways to shore up the population of younger demographics.
The Dispatch Editorial Board is made up of publisher Peter Imes, columnist Slim Smith, managing editor Zack Plair and senior newsroom staff.
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