You can only deduct so much of your wages for Social Security taxes before you run out of money to spend on other things. A new report from the Congressional Research Service seeks to change that.
As long as you’ve worked, your “taxable earnings base,” or the portion of your salary that can be taxed for health care benefits, has remained fairly constant. Inflation and wage growth are taken into account when determining the annual earnings cap.
Over the last five years, the wage gap between those receiving Social Security benefits and those not has grown by over 15%, according to the Society for Human Resource Management. In 2017, the wage cap was $127,200, and it will rise to $147,000 in 2022.
The CRS found that a changing economy has created inequalities in this system, which had previously worked without conflict for many years. There has been a “relatively stable” 94 percent share of the population below the income cap since 1982.
“The percentage of aggregate covered earnings that are taxable has decreased from 90 percent in 1982 to 83 percent in 2020,” the report states.
As a result, the Social Security Trust Fund has more money to spend than it did 35 years ago. 35 years ago, 10% of income in the United States was above the taxable earnings base; today, that percentage is 17%.
In short, the gap between the rich and the rest of us has widened significantly over the past few decades, compared to what it was a few decades ago. The wealthy continue to amass wealth.
Also Read: 9 Social Security Myths Busted: What Retirees Need to Know
There are many social and economic consequences to wage inequality, but it is also a systemic economic problem that threatens Social Security benefits.
Increasing revenue and strengthening the financial position can be accomplished by ensuring a constant tax base, according to the CRS’s research team. Indirectly, this would raise the income limit.
There are some proposals to raise the taxable earnings base to consistently tax 90 percent of aggregate covered earnings, bringing it back to roughly the level of coverage that Congress last took a major reform effort to address Social Security solvency in 1982, according to a report.
The agency would take in all of the country’s income for the year and tax 90% of it, meaning that everyone who earns more than 90% of the total would be subject to the tax.
Also Read: Is Your Spouse Eligible for Social Security Benefits? You Might Be Surprised By These 3 Rules.
According to projections, only about 8% of taxpayers would be affected if such a change were to occur. To cover 90% of total covered income, higher tax rates would be levied on those taxpayers who earn more than this threshold.
This means that the vast majority of workers will not have to worry about an increase in Social Security taxes.
In order to stabilize a Social Security system that makes headlines every year because of concerns about its ability to remain liquid, more revenue could be generated.
As the wealth gap widens and baby boomers begin to retire in greater numbers, this new research could give new life to the argument for restoring the 90 percent threshold to federal taxation.
