The debate about Social Security rages on, and the latest version is making the case that the rich might be killing Social Security. This seems like a socialist political construct, but for the sake of objectivity we will take a look at it and examine its merits.
One of the underlying arguments for the claim is that a person who makes more than $132,000 a year ceases to have any additional Social Security taxes withheld from their check. That limits the amount of revenue flowing into the system, a total of 12.4 percent of that exempted income. The employee pays in 6.2% and the employer matches that percentage. There are approximately 16,000 people who make at least $10 million a year, so the math works out to almost $10 billion a year more from this select group alone.
The total estimated additional inflow to the Social Security fund from all exempt wages can be as high as $1.2 trillion, providing money to a system that is reportedly in desperate need of a fix before 2030, when outflows are expected to exceed inflows. In effect, the idea is not to tax the rich more but to tax the high wage earners equitably.
While this seems fair on the surface, making the issue one of inflow and outflow hides a very important problem – the vast majority of those high wage earners are very likely not to need Social Security benefits to fund their retirement. According to Social Security, the current 2019 maximum monthly benefit check is capped at $2.687. That comes to $32,244 a year, hardly a major consideration for this group of retirees. One idea that has come up in the past, that these high wage earners should not consider collecting Social Security because they simply don’t need it, would result in a savings of just over $500 million a year from those 16,000. Expanding that idea to a larger group of high wage earners will not address the long term problem. It needs to be pointed out that this maximum benefit amount can only be paid to people who took in the maximum taxable earnings for at least 35 working years. This reduces that potential number of maximum benefit recipients considerably, and with it the potential savings.
An uncomfortable truth about Social Security benefits is believing that you can expect the monthly check to cover all of your retirement expenses has been a deception that has been going on for decades. The creation of IRAs, Keogh Plans, 401(k) and an assortment of other financial instruments were designed to allow individuals to begin taking on the responsibility for their own retirement futures. While the average monthly check is only half of the maximum benefit, many Americans who have made minimum wage or less for a good portion of their working years will not even see that much in their bank account every month. Yet this is neither a fault of the rich or poor.
This leads to the income inequality argument, which proposes the problem can be solved by requiring the rich to close this gap by paying more into the system. The rebuttal from the wealthy is that the American economic system by design will not allow everyone to make the same amount of money. The number of variables that make this a reality are more an issue of inequality of nature than inequality of income. Not everyone has the same skill sets. Some people excel at engineering railroads, while other have athletic skills that are unparalleled. The athlete may make considerably more money than the engineer, only because of the demand of their individual talents.
This argument is more of a reality than opinion. This disparity is scaled throughout the American economy, and the idea that increasing taxes on the rich will create an economic balance ignores the reality. Anyone who has had a 9 to 5 job knows that there are people who make the same amount of money but don’t work as hard. This can be seen as labor inequality, but it is perhaps more common than the perceived income inequality.
Fixing Social Security by increasing the tax on higher wage earners is not the solution. The actual problem is for people to find ways to better equip themselves for the inevitable retirement year at an early age, using Social Security as a supplemental, not an essential, part of their retirement income. When that goal is achieved, future generations will be able to have a proper perspective of Social Security and create opportunities of their own to bridge the gap.