Over the next decade, the amount of payroll taxes flowing into Social Security is expected to drop, but not for the reason that most people think — because Baby Boomers are retiring. To the contrary, according to the Congressional Budget Office (CBO), the loss in payroll taxes from the retirement of Baby Boomers will be offset in part by income taxes on portion of their Social Security benefits. Those taxes are expected to rise over time, because the income thresholds subjecting benefits to taxation are fixed.
According to the CBO, the reason for the drop in payroll tax is the growing number of people will be earning more than taxable maximum amount of wages. The CBO estimates that the drop in payroll receipts will be due to “rising wage inequality.” The wages of the highest-earning workers are growing faster than those of middle and low-income workers, and a greater share of those higher earning workers’ wages will be above the maximum amount subject to Social Security payroll taxes, which is currently $127,200.
In the entire history of the Social Security program, Congress has only adjusted the amount of payroll earnings subject to tax two times, which affected two periods — 1937-1974 and 1979-1981. Since 1981, the level of earnings subject to payroll taxes have been determined by automatic increases in most years, determined by the growth in the wage index. But the growth of wages for middle to lower earners has flattened since that time, slowing the growth in the wage index.
To address the problem, some 73% of participants in TSCL’s 2017 Senior Survey think high-income earners should pay Social Security taxes on all of their earnings. Lifting the maximum amount of wages upon which Social Security taxes are paid would have a significant positive impact on the solvency of the program, supplying solvency for up to 75 years.
Shoring up the program by taxing all earnings would have another effect on the program as well — it would pay for greater retirement security by providing a more fair and adequate annual cost-of-living adjustment.
What can you do to get involved? Tell others! Let others know how rising costs are affecting you and how income inequality is negatively impacting Social Security. Everyone needs to pay their fair share into Social Security!