Understanding How Social Security is Funded
Most government services are funded by taxes. In the case of Social Security, funding is through special taxes levied on incomes. According to Forbes, 12.4 percent of a worker’s income is subject to these payroll taxes up to a maximum income of $176,100.
It’s important to understand that the payroll tax revenue employees pay goes into a pool of funds known as the Social Security trust fund. There are no individual accounts.
Social Security Solvency
The problem is that in recent years the money paid out for benefits is more than the money being added to the Social Security trust fund. That’s because benefit amounts are increasing from annual cost-of-living adjustments (COLAs) and the number of people receiving Social Security has increased as baby boomers aged.
Income Inequality
Another issue is rising income inequality. According to the article, between 1983 and 2000, “the best-paid 6 percent of people saw their incomes rise by 62 percent in inflation-adjusted terms. The other 94 percent saw incomes increase by 17 percent.”
A large portion of workers’ income now far exceeds the wage cap. This clearly benefits higher-wage earners because they are paying a significantly smaller portion of their income in payroll taxes. It’s unfair that a person earning $176,100 pays the same amount in taxes as someone making $500,000 or even $5 million.
The Seniors Trust believes a much more equitable way to fund Social Security would be to lift the wage cap so that everyone pays their fair share. It’s one of the tenets of The Social Security Expansion Act.
This landmark piece of legislation calls for lifting the cap on Social Security taxes to ensure that the wealthiest Americans pay a fairer amount in relation to their income. The bill’s sponsors say doing so would extend the solvency of Social Security by 75 years.
