CEPR’s calculator lets you see for yourself when people with various wage incomes stop paying into Social Security.
Some earnings levels you might try entering:
- $54,132: median annual household earnings of a full-time worker
- $31,200: annual before-tax earnings of a full-time worker paid $15 per hour
- $616,667: salary of Norfolk Southern Railway CEO Alan H. Shaw whose total compensation with stocks and bonuses is over $4 million. (A Norfolk Southern train carrying toxic materials derailed in Ohio earlier this month displacing and endangering thousands of people across the state).
Most of us pay income and payroll taxes on all of our earnings, all year round. But only two months into 2023, millionaires have stopped paying Social Security taxes for the year.
Social Security provides one in six Americans with retirement, disability, and survivor benefits, including 13 million children with a deceased, formerly wage-earning parent. Social Security is financed by a 6.2 percent payroll tax paid by workers and an additional 6.2 percent paid by employers. In 2023, the tax only applies to the first $160,200 of earnings. That means someone whose paycheck is $83,333 a month—and $1,000,000 over the year—stops contributing to Social Security on February 28, 2023.
The vast majority of workers are paid less than $160,200 per year, so they pay the 6.2 percent social security payroll tax on all of the paychecks they receive in 2023. But workers who earn over $160,200 pay no tax on their earnings above this level. For a millionaire only about 1 percent or less of their total earnings go to supporting Social Security. Despite earning much more than the average worker, a millionaire’s effective tax rate is far lower than the average worker’s. As a result, the burden of supporting Social Security falls most heavily on working-class and middle-class people.
The Social Security Trust Fund is projected to fall short of the amount needed to continue paying full benefits in coming years. This is largely due to increasing income inequality. When the payroll tax cap was implemented in 1983 only 10 percent of earnings exceeded it and went untaxed. But by 2021, the amount of earnings above the cap had grown to 18.6 percent. Continued upward income redistribution has shifted more earnings out of range of the program’s supporting tax.
Scrapping the payroll tax cap entirely and making everyone pay the same tax rate, along with moderate changes, would close the current projected shortfall and allow for expansions that improve Social Security’s adequacy and inclusiveness.
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As someone deeply versed in economics, particularly in the realm of social security and taxation, I can confidently discuss the intricate workings highlighted in the provided article. The Center for Economic and Policy Research (CEPR) offers a calculator allowing individuals to visualize when individuals at various income levels cease contributing to Social Security, shedding light on the systemic disparities in our current tax structure.
Let's break down the concepts referenced in the article:
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Social Security Taxation Thresholds:
- The article elucidates how Social Security is funded via a 6.2 percent payroll tax from employees and an additional 6.2 percent from employers. Importantly, in 2023, this tax applies only to the first $160,200 of earnings. Thus, individuals earning above this threshold cease contributing to Social Security, creating a disparity in taxation.
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Impact on Different Income Strata:
- The article contrasts the tax burden between average workers and high-income earners. Workers earning below the $160,200 threshold pay the Social Security tax on all their income throughout the year. However, those earning beyond this cap contribute only a fraction of their total income to Social Security, disproportionately affecting the working and middle classes.
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Income Inequality and the Trust Fund:
- Increasing income inequality is cited as a significant factor in the projected shortfall of the Social Security Trust Fund. Over time, a larger percentage of earnings have surpassed the taxable threshold, leading to a decline in the program's revenue.
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Potential Solutions:
- To address this imbalance, the article suggests eliminating the payroll tax cap entirely. This proposal aims to ensure that everyone, regardless of income level, contributes at the same tax rate. This move, coupled with moderate adjustments, is projected to address the current shortfall in funding and even allow for expansions in Social Security benefits.
The discussion here reflects the complexities of income taxation, Social Security funding, and the widening income gap, demonstrating the need for structural reforms to ensure the sustainability and fairness of the system.
CEPR's work highlights these disparities and advocates for policy changes to create a more inclusive and robust Social Security system. Their call for support underscores the importance of informed discussions and research in shaping equitable economic policies.
