Understanding the Social Security Tax Cap Controversy
Social Security — the federal program that provides benefits to nine out of ten Americans over the age of 65 — is facing a funding shortfall. Its reserves are predicted to be depleted within 10 years. At that time, Social Security will no longer be able to provide retirees with their full benefits. That’s a very frightening thought considering two-thirds of older Americans would be in poverty according to a report by the Peter G. Peterson Foundation, a nonpartisan organization dedicated to addressing America’s long-term fiscal challenges to ensure a better economic future.
Questioning Tax Equity
Social Security is primarily funded by payroll taxes, formally known as Federal Insurance Contributions Act (FICA) taxes. Only a portion of workers’ wages are taxed. The limit on annual earnings subject to Social Security taxes is referred to as the taxable maximum or the Social Security tax cap. For 2024, that maximum is set at $168,600; that’s an increase of $8,400 from last year.
The problem is that Social Security taxes are regressive, not progressive like individual income taxes. In that case, higher wage earners pay a larger share of their income in taxes. However, low- and moderate-income individuals pay a higher proportion of their income in payroll taxes. For example, someone who makes $67,000 a year would pay $4,154 in Social Security taxes, while someone making $201,000 would pay $10,453 in Social Security taxes. This has many people questioning tax equity because the person making three times as much income pays only two and a half times the amount of tax.
Scrap the Cap
Increasing the Social Security tax cap — or eliminating it altogether — has often been floated as a way to shore up Social Security’s funding shortfall. That idea is one of the tenets of the Social Security Expansion Act, which The Seniors Trust fully supports.
The Social Security Expansion Act promises to extend the solvency of Social Security for 75 years by requiring the wealthiest American households to pay their fair share of taxes. According to the bill’s sponsor, Sen. Bernie Sanders, “Today, because of the earnings cap on Social Security taxes, a CEO making $20 million a year pays the same amount of money into Social Security as someone who makes $160,200 a year. This legislation would lift this cap and subject all income above $250,000 to the Social Security payroll tax. Under this bill, over 93 percent of households would not see their taxes go up by one penny.”
You can show your support for the Social Security Expansion Act by signing our petition to Congress.
