Is dropping the taxable income base a solution to social security solvency?
Is dropping the taxable income base a solution to social security solvency?

Is dropping the taxable income base a solution to social security solvency?

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Social security taxes are deducted from every paycheck you receive throughout your working life until you retire and start claiming benefits yourself. The taxable basis is the salary range for which social security taxes can be deducted from their payslip. For 2022, salaries up to $ 147,000 will be taxed for that purpose Social Security – but all over it will not.

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This means that if someone earns $ 1 million a year, for example, a very small percentage of their salary will go to the same taxes that others who earn much less pay a larger percentage of their salary to.

This system has more or less worked in the last few decades, but increasing wealth disparities and overall program solvency have created new problems. Many are now calling for dropping the taxable income base to increase social security income. The Congressional Research Center writes that “raising or removing the taxable income base is a policy change that would increase revenue from the Social Security program and reduce the expected long-term deficit.”

This deficit is largely exacerbated by rapidly retiring boomers and a smaller percentage of total wages goes to social security. Since 1982, the proportion of the population below the income threshold has been relatively stable at around 94%. However, rising wage inequality has reduced the percentage of total covered taxable income from 90% in 1982 to only 83% in 2020.

If the taxable income base is removed, the CRS states that all wages will be subject to social security taxes and included in the calculation of benefits. Although this sounds like a tax increase, very few people would actually be affected.

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Only about 8% of taxpayers are expected to be affected by a change in the limits of the taxable income base. These would mainly be high-income taxpayers, who would also end up paying more total tax in general if the earnings base were raised to cover 90% of the total covered income. For over 90% of workers, no changes would take effect at all – except for greater assurance that social security will remain solvent in their own retirement years.

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About the author

Georgina Tzanetos is a former financial advisor who studied post-industrial capitalist structures at New York University. She has eight years of experience in concentrations in asset management, portfolio management, private client banking and investment analysis. Georgina has written for Investopedia and WallStreetMojo.

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