Today is just another day for millionaires and billionaires, but for the rest of American’s workers—it’s significant. February 19th, 2020 marks the date when America’s wealthiest stop paying into Social Security for the rest of the year. This is because Social Security payroll contributions are capped at $137,700 in annual wages, a ceiling the average millionaire hits on this very day. Everyone else keeps contributing to the program through December 31st.
"Normal Americans pay social security tax on every cent of income they earn throughout their entire lives, but millionaires like me pay it on just a fraction of our earnings."
A worker earning $50,000 contributes to Social Security all year, with an effective tax rate of 6.2 percent. However, an income earner making $1,000,000 stops paying Social Security taxes today. This person’s effective tax rate would be just 0.8 percent. As the Center for Economic Policy Research pointed out, “The burden of Social Security taxes falls more heavily on those who make less.”
Some of America’s wealthiest recognize the inherent unfairness in the system. “Normal Americans pay social security tax on every cent of income they earn throughout their entire lives, but millionaires like me pay it on just a fraction of our earnings,"said Morris Pearl, Chair of the advocacy group Patriotic Millionaires.
In decades past, more than 90 percent of Americans fell below the wage cap. But thanks to growing income inequality, today only about 80 percent of people earn below the $137,700 limit. The erosion in covered earnings largely stems from the fact that wages for the highest paid workers have been rising faster than wages for the majority of people who make less than the cap. The cap simply has not kept pace with economic changes.
That leaves about $2 trillion in annual wages which are exempt from the Social Security payroll tax. At a time when Social Security’s future finances need a fix, this represents an enormous amount of untapped revenue. If Congress takes no action, the Social Security trust fund will be exhausted in 2035, after which it still could pay 80% of benefits—but no one wants that outcome. We could go a long way toward closing the program’s funding gap by adjusting the payroll wage cap so that the wealthy contribute their fair share.
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“By raising the cap on payroll taxes, we can guarantee that millionaires pay the same rate as everyone else, and we can ensure that our seniors live and retire in dignity,"said Pearl.
In fact, there is legislation in Congress to make this very fix to Social Security and help ensure its future solvency. Senator Bernie Sanders’ Social Security Expansion Act would subject earned income over $250,000 to the Social Security payroll tax. Congressman John Larson’s Social Security 2100 Act would apply the payroll tax to wages above $400,000, then phase out the cap altogether. Both bills would modestly increase Social Security benefits and keep the program financially healthy for most of the rest of this century.
Surely that is a more economically sound solution than what so-called “entitlement reformers"propose—including raising the retirement age, adopting a less accurate cost-of-living adjustment formula, or slashing benefits in other ways.
Tomorrow’s retirees—especially those on the lower rungs of the income ladder—will need every penny of their Social Security checks to stay out of poverty. Nearly half of today’s beneficiaries rely on Social Security for all or most of their income. Future retirees won’t be able to afford benefit cuts. Thanks to growing income inequality, wage stagnation and the disappearance of pensions, saving for retirement will become harder in the future, not easier.
Isn’t it fairer to ask those on the opposite end of the income spectrum to contribute more? In exchange, they would receive higher benefits (subject, of course, to Social Security’s progressive formula which replaces a higher percentage of income for lower wage earners).
By moving forward deliberately with common sense and compassion, perhaps some day we no longer will mark this day in mid-February that represents such a gross disparity in what working Americans and the wealthy contribute to Social Security.