Social Security has been a financial rock for seniors ever since benefits first began flowing in 1940. For decades though, for those above an income threshold, pieces of that rock have been chiseled away: a 1983 law makes up to 50 percent of benefits subject to federal income taxes.
Levying a tax on benefits was a new idea at the time, promoted as one of the ways to help save Social Security for future generations. The system’s trust fund was only months away from running out of money, and revenue from the tax would be dedicated to keeping the program solvent. The reform was overwhelmingly approved by Congress and signed into law by President Reagan. As he said at the signing, it “demonstrates for all time our nation’s ironclad commitment” to Social Security.
For those in the earnings stratosphere, Social Security taxes literally begin and end on New Year’s Day.
It also demonstrates, in 2024, the unfairness of never adjusting the income threshold for inflation. When the levy first began, fewer than 10 percent of recipients had to pay taxes on any of their benefits. Today that number has risen to roughly 56 percent. Putting it simply, a threshold that hasn’t changed in 40 years is forcing millions of retirees with modest incomes to pay higher taxes than they should.
Now let’s look at Social Security’s second unfairness, letting workers with huge incomes pay lower taxes than they should. Ironically, the only fair thing about this unfairness is that an annual adjustment is made.
Most workers pay Social Security taxes on every dollar they make. Big earners, though, avoid those taxes by the billions: there’s a dollar cap on earnings subject to the Social Security tax. The cap rises yearly at the same rate as average wages. This year’s cap is $168,000, up from $160,200 in 2023.
For those in the earnings stratosphere, Social Security taxes literally begin and end on New Year’s Day. As the headline in a piece by retirement expert Teresa Ghilarducci put it, “200 People Already Paid Their Social Security Taxes: Happy New Year!” By her calculations, Elon Musk hit the 2024 earnings cap at 12:04 a.m. on New Year’s Day; for Tim Cook of Apple, it took all of two hours.
Inevitably, the cap has become a serious drag on the program’s long-term fiscal health. The trust fund is once again running low, set to reach zero in 2033. Unless Congress acts, benefits will then have to be cut to 77 percent of current levels.
Social Security is far too popular for Congress to ever let that happen. The only real question is how lawmakers elect to stop it from happening. True to their history, Democrats and Republicans differ sharply.
A solid majority of Republicans are all in on raising the retirement age, first from 67 to 69 and then to 70. Both moves would effectively cut benefits for everybody and favor upper income earners, whose life expectancies are far higher.
No way, says Senator Bernie Sanders of Vermont: “When half of older Americans have NO retirement savings, we don’t need to cut Social Security. Legislation I introduced last year would make Social Security solvent for 75 years, expand benefits by $2,400 a year, and NOT raise taxes on anyone making less than $250,000 a year.”
The Sanders bill, co-authored with Senator Elizabeth Warren of Massachusetts, would impose payroll taxes on any work income over $250,000; in other words, the cap would be reset at $250,000. House Democrats have their own reform bill, Social Security 2100: A Sacred Trust, sponsored by Connecticut Rep. John Larson. It would set the cap at $400,000.
Hurrahs for both bills, and boos too. Each goes a long way in the right direction. At the same time, both stop short of going the whole way.
When Sanders first introduced his bill, here’s part of what he said: “Today, absurdly and unfairly, there is a cap on income subject to Social Security taxes.” It’s just as absurd to exempt income between this year’s cap and $250,000, or this year’s cap and $400,000. The payroll tax should apply to all work income, period. That makes the most sense, raises the most revenue, and helps Social Security the most.
Equally important, Congress should sharply raise the income floor for taxing Social Security benefits. It’s a move that’s long overdue.
Yes, raising the floor would decrease the tax revenues coming into the trust fund. The shortfall should be made up by taxing all the benefits paid out to high-income retirees. They now pay on 85 percent, but that figure hasn’t changed in a generation: it was set in 1993.
They shouldn’t mind. After all, the money will secure Social Security for their sons and daughters, and grandsons and granddaughters, and on and on.
