The Social Security solution hiding in plain sight

When he pays his federal taxes for 2022, Elon Musk will owe exactly $9,114 for Social Security. So will Jeff Bezos, Mark Zuckerberg and anyone else who made more than $147,000 last year.

That low bill is due to the cap on Social Security taxation. Under current law, every U.S. employee contributes 6.2% of their paycheck to pay for the old-age insurance program, and their employer chips in another 6.2%. But there's a limit on how much of each wage is subject to this taxation. In 2022, the cap was $147,000. This year it's $160,200. 

In effect, what that means is that a podiatrist or software engineer earning $160,200 this year will pay the same Social Security tax as a multibillionaire. Some experts say there are good reasons to keep this rule in place. But others would like to see Congress remove it — or, as some put it, "scrap the cap."

"If I had the opportunity to move parts around for how you would make the program solvent, my first choice would be getting rid of this cap," said Mary Johnson, a Social Security policy analyst at the Senior Citizens League, a Virginia-based advocacy group for American seniors. "I feel very much that it is a very regressive aspect of our tax code."

Many others agree. Senators Bernie Sanders, a Vermont Democrat, and Elizabeth Warren, a Massachusetts Democrat, have proposed legislation to phase out the cap, calling it "absurd." Even in the wealth management industry, the idea has supporters. Healthview Services, a company in Danvers, Massachusetts that provides data on healthcare costs to financial firms, has long advocated lifting the tax max.

"I think that makes a lot of sense, and personally I hope that's something Congress will look at," said Ron Mastrogiovanni, Healthview's CEO. "That will help the program stay in place."

Social Security, which will pay out more than $1 trillion in benefits this year, is currently barreling toward insolvency. According to last year's report by the program's board of trustees, the entitlement will only be able to make 80% of its scheduled payments by 2035, or 74% by 2096. 

Congress is unlikely to let that happen to the program, which is highly popular with voters. One poll by AARP, the retiree advocacy group, found that 96% of U.S. adults support the New Deal-era safety net.

But if the shortfall does happen, millions would feel it. This year, nearly 67 million Americans depend on Social Security, including 48.6 million retirees, 7.6 million disabled workers, 5.9 million survivors and all their dependents.

By the program's own estimate, getting rid of the tax cap could go a long way toward solving this problem. The Social Security Administration has calculated that if all income — not just the first $160,200 of each wage — were taxed starting in 2023, this would eliminate 75% of Social Security's funding shortfall over the next 75 years.

Political obstacles
So why aren't more politicians talking about this? As Congress battles over the federal budget, Democrats and Republicans have been arguing over how best to protect the massive entitlement program — but the tax max has barely come up. Instead, the debate has largely fallen along two lines: Some GOP leaders have proposed making cuts to the program, either by reducing benefits or raising retirement ages. President Biden, meanwhile, has declared it should be left alone.

"I guarantee you I will protect Social Security and Medicare without any change," Biden said last week as he unveiled his budget in Philadelphia. "I won't allow it to be gutted or eliminated, as MAGA Republicans have threatened to do."

This marks a retreat from what Biden was proposing in 2020. During that year's election, he didn't just call for protecting the status quo; he also recommended taxing all income above $400,000 for Social Security. While this would not eliminate the rule right away, the "donut hole" between the cap and the $400,000 threshold would eventually close because the tax max inches up each year to account for inflation. 

This year, the president isn't mentioning that plan. Why not? Johnson says one major reason is that Biden knows he couldn't pass it this year. With Republicans controlling the House of Representatives and only a razor-thin Democratic majority in the Senate, a bill to raise taxes for Social Security is most likely a non-starter.

"This tax would be subject to the supermajority rules," Johnson said. "So that would be very difficult to enact in a divided House and a divided Senate."

Politics and policy

Biden proposes tax hike on income over $400,000 to fund Medicare

March 7, 2023 1:41 PM

The pro-cap argument
But there are also non-political reasons to leave the tax cutoff in place. John Sabelhaus is a senior fellow at the Brookings Institution, a public policy think tank in Washington, D.C. For all its flaws, he believes the cap should not be scrapped.

"I am generally opposed to raising the tax max any faster than it is already going up," Sabelhaus said. "I am the first to say that the wealthy and high earners should pay more in taxes — just not this tax."

The problem, he said, is that for Social Security, both taxes and benefits are based on income. The amount of income each American receives from the program is proportional to how much they paid into it. So if the system were left as it is, removing the cap wouldn't just raise taxes on wealthier Americans — it would also dramatically increase the benefits owed to those taxpayers. 

"Bill Gates pays just as much Social Security tax as I do, but he also gets the same in benefits, because we are both above the tax max," Sabelhaus said. "If you raise the tax max and pay the extra benefits to the high earners, then it helps with the shortfalls, but not much … So the higher taxes are mostly offset by the higher benefits."

In theory, uncoupling taxes from benefits is not impossible. In fact, that's what Biden suggested in his 2020 plan, and what the Social Security Administration stipulated in the 75-year estimate it made last year. But even if Congress somehow accomplished this change, Sabelhaus said, it may not be worth it.

"If you raise the tax max and don't allow the higher benefits, you can solve a lot of funding problems, but on the shoulders of the top 15% of today's earners," he said. "That will make them (understandably) unhappy, and you risk losing their support for Social Security."

This loss of support could be not only political, but financial. Many of these high earners, Sabelhaus suspects, might disguise their income as "profits" instead of "wages," because profits are not taxed for Social Security. 

Rather than scrapping the cap, Sabelhaus believes all Americans should accept that keeping Social Security going will require some sacrifice.

"Given that the children of the Baby Boom are living longer and having fewer children, solvency through their retirement will require higher taxes or lower benefits," he said. "Shifting all that onto today's high earners is dangerous policy."

Are Republicans really trying to kill Social Security?

The longer view
Others see room for compromise. Rather than immediately ending it, Johnson said, the tax max could be gradually "phased out."

"I have always felt there would be a need to phase in this kind of change so that you would not be disrupting the U.S. economy," she said. "New taxes are often phased in. It could be over a five- or 10-year period."

Sanders' and Warren's plan, for example, calls for the taxing of all income above $250,000 per year. Like Biden's 2020 proposal, this would create a "donut hole" that would slowly shrink into nothing.

There is a precedent for scrapping the cap — with a different entitlement program. Medicare once had its own payroll tax max, but President Bill Clinton and a bipartisan group of lawmakers ended it in 1994. Could today's government do the same?

"The question to ask is, why aren't we doing it?" Johnson said. "We got rid of it then. Why aren't we doing that now for Social Security?"