Tax The Rich: Dropping the Taxable Earnings Base Just Might Save Social Security

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There is a limit on how much of your wages can be taxed for Social Security, and how much you can take home as a result — but a recent report by the Congressional Research Service is fighting to change that. 

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The amount of your salary that can be taxed for benefits, or the “taxable earnings base,” has been a relatively fixed amount for decades. The earnings base, or cap, is adjusted every year for inflation and wage growth. According to the Society for Human Resource Management, the Social Security wage gap has grown more than 15.5% over the past five years. In 2017, the wage cap was $127,200 and for 2022 it will be $147,000. 

For years, this system worked more or less without conflict, but the CRS found that a changing economy has created inequality in the system. Since 1982, the share of the population below the income cap has remained “relatively stable at roughly 94%.” Due to an increase in wage inequality over the last couple of decades, though, “the percentage of aggregate covered earnings that is taxable has decreased from 90% in 1982 to 83% in 2020,” according to the report.  

This means there is more money floating around untaxed for the purposes of Social Security than there was 35 years ago. Ten percent of income in the U.S. was above the taxable earnings base 35 years ago — but now that number has climbed to 17%. 

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In short, there is a greater difference in how much money the rich make now  vs. how much the average American makes compared to a couple of decades ago. The rich are getting richer. In addition to having social and societal impacts, wage inequality is a systemic economic problem that also now threatens the solvency of Social Security benefits.

The research team at the CRS suggested maintaining a consistent tax base to increase revenue and improve solvency. This would mean raising the income caps indirectly. “Some have proposed raising the taxable earnings base to consistently tax 90% of aggregate covered earnings, restoring it to roughly the level of coverage in 1982, when Congress last undertook a major reform effort to address Social Security solvency,” the report stated. The agency would look at all of the income in the country for the year and simply tax 90% of it — and whoever falls within that 90% gets taxed.

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An important thing to note: only about 8% of taxpayers are projected to be affected if a change like this were ever to take place. These would be high-earning taxpayers who would also pay more taxes in general if the taxable earnings base was raised to cover 90% of aggregate covered income. This means the greater majority of workers will not need to worry about an increase in their monthly tax paid to Social Security.

Increased revenue could help stabilize a Social Security system that seems to make headlines every year with worry surrounding its ability to remain liquid. While there is currently no legislation in place to remove the taxable earnings base, as the pandemic exacerbates the wealth gap and seniors retire at increasing rates, this new research could breathe life into the argument for toggling the benchmark back to 90%.

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About the Author

Georgina Tzanetos is a former financial advisor who studied post-industrial capitalist structures at New York University. She has eight years of experience with concentrations in asset management, portfolio management, private client banking, and investment research. Georgina has written for Investopedia and WallStreetMojo. 
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