Most likely you will pay your Social Security taxes all year round. But some high earners will stop paying a few hours after we ring in the New Year, many before we return to work in the new year.
Social Security benefits are paid by the FICA tax, which is 12.4% of pay (split evenly between the employer and the employee). But earnings are taxed only up to a cap. In 2019, the cap was $132,900, a threshold that rises to $137,700 in 2020. Ninety-five percent of American workers pay FICA tax all year long because our annual earnings fall below the cap, while 5% stop paying sometime during the year when their earnings reach $137,700.
Who are these people who don’t pay Social Security taxes all year?
People don’t post their salaries, so we don’t know who is the highest salaried person in America. We know the richest man in the world is Jeff Bezos, but the system doesn’t tax wealth, it taxes wages and salaries (Social Security could tax wealth, but it never has). Public companies post the salaries and bonuses of their executives and these filings show that the highest-paid executives in 2019 were Safra Catz and the late Mark Hurd, the co-CEOs of tech giant Oracle, who each earned $108 million. At that pay level, executives effectively finish paying their Social Security taxes before noon on New Year’s Day.
In 2018, 168 million workers paid a total of $874 billion into the Social Security system. I don’t know the names of all the 1,174 people in 2018 who earned over $20 million or the 211 employees who earned over $50 million each (with an average salary of $95 million). But these extremely wealthy people paid Social Security taxes only on the first $128,400 they earned in 2018. On average, those 211 people at the top will stop paying Social Security taxes about 12 working hours into 2019.
Social Security Is Short of Funds Because of Income Inequality, Not Longevity Increases
Social Security is in good shape, but the program will have enough money to pay only 80% of benefits in 2034 unless the system obtains the equivalent of about one trillion dollars. That is unfortunate, because the Social Security system as it stands plays a crucial role in narrowing retirement wealth inequality between the rich and the poor.
Some people wrongly think that people living longer is causing Social Security’s revenue shortfall. But Social Security actuaries can count. They count babies and budgeted in anticipation of Baby Boomers’ retirement and longevity improvements. What the actuaries didn’t predict—and what is hurting the system—is the growth in extreme earnings inequality and ever-increasing health insurance premiums that aren’t taxed for Social Security.
According to Urban Institute economists Karen Smith and Eric Toder, the inequality of wage income and taxable wages escaping as health insurance premiums are the most salient and unexpected reasons for the shortfall. The Economic Policy Institute found that most labor earnings growth since 1979 has gone to the top earners; the top 1% wages grew 158% since 1979, while wages for the bottom 90% grew only 24%.
Lopsided growth in earnings is the main reason behind the system’s shortfall. Every year, the earnings cap means that over $1.2 trillion dollars of earnings—wages and salaries, not capital income—of an economy-wide $8.4 trillion in taxable earnings escapes Social Security tax. That’s over one-fourth of total earnings.
This escape happens not by design, but by accident. According to Kathleen Romig of the Center for Budget and Policy Priorities, in 1983, Social Security reformers never imagined we would see such a rapid increase in earnings above the cap, nor did they imagine that workers in the bottom 95% of earnings would experience wage stagnation during the 1990s and 2000s. Otherwise, they might well have raised the earnings cap, putting more revenue into the system.
How To Fix Social Security
The Social Security game produced by the American Academy of Actuaries makes it easy to choose a combination of revenue raisers and benefit cuts to balance the program’s long-run budget. Since we are approaching an overall retirement crisis as boomers continue to retire and the 401(k) system falls short for many workers, it makes no sense to cut Social Security benefits. Revenue increases are the practical solution and two ways to raise revenue can fix the shortfall completely.
If we eliminate the earnings cap and assess FICA on currently tax-deductible health care premiums, Social Security is fully solvent for 75 years. Higher income workers would pay more, but there is no evidence that increasing revenue to the system is unpopular. Because raising the cap would mean only a few of the highest earners pay more, it is unlikely to inhibit overall economic activity or cause any meaningful economic harm.
Keep in mind that in 1994, a bipartisan group of politicians eliminated the Medicare earnings cap. Since then, everyone pays Medicare taxes all year long. And since 2016, higher earners pay a surcharge. The Medicare tax is only 2.45%(combined employer and employee tax—the worker effectively pays the employers’ portion).
We could also collect revenue for Social Security from income that is currently not counted as labor income. The three richest Americans—Bill Gates, Warren Buffett and Jeff Bezos—together hold more wealth than 160 million American households. Taxing unearned income—income received passively from interest and dividends—would be a big change in the system, maybe for the better, but that is for another debate.
If we raised the cap but did nothing else to the basic bones of the system, taxing only earnings and not wealth, 88% of the shortfall would be solved. Or we could not touch the earnings cap, but increase the FICA tax from 12.4% to 15.23% to close the entire gap. The employee and employer would each pay 7.615% instead of 6.4%. Really, take a pause. If we raised the FICA and eliminated the cap Social Security shortfall would be solved and we would have moved a long way to fixing the next coming retirement crisis.
Even conservative sources such as the Washington Examiner urge a close look at removing the cap. Eliminating the Social Security earnings cap is actually quite unlike the resolutions you made New Year’s Day about sugar and spending and fitness—raising the cap is a policy with very little pain and all gain.
The post Somebody Stopped Paying Their Social Security Taxes Today appeared first on USNewsRank.