Fixing Social Security: Increasing Taxes
By Gary Silverman, CFP®
Last week I opened a discussion of Social Security and how to fix it. The proposed fixes are numerous but fall into two basic camps. Raise revenue (taxes) or lower spending (benefits).
Since Republicans are generally resistant to any tax increases and Democrats are generally resistant to any benefit reductions, things are stuck. Compromise is what normally gets stuff unstuck, but both sides of the congressional aisle are resistant to compromise. Add to that the core of both parties tending to punish their politicians if they do compromise. All of this combines to form a blockage that dams progress on this issue and the problem gets worse every year.
The last time any significant advance was made, Ronald Reagan was president. Republicans allowed the tax rate to go up and the wage cap to be raised. Democrats allowed benefit calculations to change and the retirement age to increase resulting in fewer benefits being paid out than before. Well over 30 years have passed.
This week we’ll start looking at ways to increase the money Social Security takes in. You may notice on your pay stub that 6.2% of your earnings get sent to the Social Security system. Your employer matches that with another 6.2%. If you are self-employed you are both owner and employee so you get to cover both halves at the tune of 12.4% of your business’s earnings.
Simple solution: Raise the tax rate. Raising the amount withheld by only a few percent would eliminate most if not all of the shortfall.
Now, not all of your income is taxed for Social Security. Taxes are taken only on the first $127,200 of earnings. For most people it means that all of their earnings are taxable for Social Security. But if you are in a high wage job (that’s about 10% of y’all) some of your earnings will not be subject to the tax.
Lower-income folks pay Social Security taxes on all of their income and wealthy folks pay on what may be a small percentage of theirs. Some people feel that this is unfair. But realize that Social Security benefits are tied to the amount of wages subject to Social Security taxes, not your total wages. Thus just as taxes are capped on high income earners so are their benefits in retirement.
But indeed, one area that gets attention is the idea of raising or eliminating the cap from the amount of earnings taxed. How much this would help depends on how much of the cap you eliminate and whether or not you take the extra taxable earnings into consideration when computing future benefits. Removing the cap and giving nothing in return to the upper 10% of wage earners will fix the shortfall by itself. It would also be a Robin Hood situation where many of the 10% will feel robbed.
Next week we’ll look at benefits.
Gary Silverman, CFP® is the founder of Personal Money Planning, LLC, a Wichita Falls retirement planning and investment management firm and author of Real World Investing