There has been much talk and speculation lately that Social Security is going broke. Although not yet true, there is cause for concern regarding the long-term solvency of the program. Much of the reason is due to the fact that Social Security’s primary source of funding is payroll taxes and with the bulk of the Baby Boomer generation reaching retirement age in the coming years, the system will soon be doling out more in benefits than it’s taking in through payroll taxes. The solution seems simple enough – raise Social Security taxes.
The problem is, it’s not that simple. Let’s begin by looking at how the Social Security payroll tax is collected. All workers are required to pay a 12.4% Social Security tax on their earnings up to the annual wage cap limit – this year that’s $142,800. If you work for someone else, that’s split between you and your employer with each paying 6.2%. But, if you’re self-employed, then you have to pay the full 12.4% yourself. The important thing to keep in mind is that taxes are only collected on income up to $142,800 – anything above that is not taxed.
Many people believe this is not fair and they claim that, in fact, the system is set up to benefit higher wage earners. That’s because a person earning $142,800 pays the same amount in taxes as someone making $500,000. A more fair way to beef up the Social Security trust fund would be to lift the wage cap, rather than raise taxes. It’s actually 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 for about 52 years to the year 2071”. A study by the Center for Economic and Policy Research supports the idea that by lifting the wage cap we could strengthen the long-term solvency of Social Security.
In addition to strengthening the Social Security program, the Social Security Expansion Act also calls for increased monthly benefits for seniors and enacting an annual cost-of-living adjustment that is fairer to seniors and their unique spending habits.