SS Payroll Taxes
U.S. Senator Elizabeth Warren (D–MA) claims it’s “wrong” that a “middle-class nurse pays a higher payroll tax rate than a highly-paid CEO,” and “it’s time to protect Social Security by scrapping the cap so higher-income earners” “pay their fair share.”
IN FACT, higher-income earners are already paying more than 9 times their promised share of Social Security taxes. Here are the specifics:
- In 1935, Congress and Democrat President Franklin Delano Roosevelt enacted SS with an explicit promise that “the most you will ever pay” for the program is “3 cents on each dollar you earn, up to $3,000 a year.”
- Since then, various Congresses and Presidents have passed more than 15 laws to increase the SS payroll tax rate above the 3% promise and raise the maximum taxable wage faster than inflation.
- Adjusted for inflation, the maximum SS payroll tax is now 9.4 times the promised maximum.
- Hence, a Congressional Budget Office report on SS explains that “most high earners receive much less in benefits than they pay in taxes” for the program “over their lifetimes.”
- In addition, people with high ongoing incomes also pay a tax on their SS benefits despite an explicit pledge from the federal government that everyone who pays SS taxes for a certain length of time will receive SS benefits “regardless of the amount of property or income” they have.
- Likewise, the U.S. Treasury states that SS “benefits are generally redistributed intentionally toward lower-wage workers (i.e., benefits are progressive).”
- Lower-wage workers also receive an effective refund of most of their SS taxes through the earned income tax credit.
- Democrats and some Republicans are now lobbying to remove the cap on SS payroll taxes and make them unlimited, as Democrats did with Medicare Hospital Insurance, thereby breaking Democrat President Lyndon B. Johnson’s promise that the program would cost “no more than $1 a month” per worker.
- SS and Medicare expenses have grown to the point where they now consume 51% of all federal revenues.
- Removing the cap on SS payroll taxes would radically sever the relationship between taxes paid and benefits received, further transforming SS from a social insurance program into means-tested welfare.
- Beyond redistributing money from richer to poorer people in the same generation, SS also redistributes money from younger to older generations due to its continually increasing tax burdens.
- Accounting for interest on their payroll taxes, people born in 1900 received about 7 times more in SS benefits than they paid in taxes.
- Workers who earned average wages and retired at the age of 65 in 1980 recovered the value of their payroll taxes (including interest) in 2.8 years, while for workers who retired in 2003, it took 17.4 years.
- For workers who retired in 2020, it will take 21.6 years to recover the value of their payroll taxes, assuming that SS has enough money to pay scheduled benefits for this entire period, which it is not projected to have.
- Despite multiplicative tax increases, Social Security is projected to become insolvent in 2034 mainly because the ratio of workers paying taxes to people receiving benefits has fallen by three times since 1955 and is projected to fall further.
- One the primary factors driving these financial problems is increases in life expectancy without comparable increases in the retirement age.
- Today’s SS recipients collect benefits for 36% to 40% longer than when the program began, even though the wealthiest age cohorts in the U.S. are now 65 years and older.
- While simultaneously calling for increased taxes on younger generations so that they can receive SS benefits for longer than prior generations, many people have swallowed the following myths about the causes of SS’s financial problems.
- Roughly 76% of voters believe that SS is in trouble because it has been “looted” — but in reality — this is actually a legal requirement established in the original SS Act of 1935 that all of the program’s surpluses be loaned to the federal government and paid back with interest, which has always happened and is happening right now.
- Many people believe that SS saves their money — but in reality — SS is primarily a pay-as-you-go program that funds most of its benefits by taxing people who are currently working, much like a Ponzi scheme.
- Many people believe that SS funds have been funneled to the Supplemental Security Income (SSI) program — but in reality — SSI is merely administered by the Social Security Administration and is funded with general revenue taxes, not SS funds.
- Many people believe SS would be fine were it not for fraud — but in reality, fraud is relatively rare in SS compared to other government programs.
- Many people believe that illegal immigrants are draining SS — but in reality — they slightly improve its finances by using fake SS numbers to work, which forces them to pay payroll taxes while typically being unable to collect benefits.
- Many people believe that others who have never paid SS taxes are collecting benefits — but in reality — people cannot collect SS old-age or disability benefits unless they have worked while paying payroll taxes for significant periods of time, typically at least 10 years.
- All of these myths have enabled creeping socialism in which each generation of beneficiaries takes more of the next generation’s paychecks.
