The availability of social security benefits to millennials in retirement has become both a point of concern in the United States and a topic for political debate. Many worry that while the number of people claiming retirement benefits continues to grow and the fertility rate (the number of births per 1,000 women between 15 and 44 years old) decreases, the $2.89 trillion currently held in the social security trust funds will eventually run out. That’s because more benefits are being paid out than the total amount of social security tax being paid in to the government. In 2018, that difference was $79 billion.
Ex5 Podcast Episode 6: Taxes
The money funding social security is generated by a 12.4% payroll tax, paid half by the employer and half by the employee. That tax is only paid on a portion of each employee’s compensation, a number which is subject to annual adjustment. In 2018, that 12.4% tax was only applied to your first $128,400 of earnings. This means that if you made $40,000, 12.4% of every dollar you earned went to social security. Similarly, if you made $128,400, 12.4% of every dollar you earned went to social security. But, if you were fortunate enough to make $150,000, 12.4% of $128,400 went to social security and there was no social security tax paid on the remaining $21,600 you were paid.
Based on the 2014 US Census data, this would mean that there were over $700 billion in earnings by Americans that exceeded the $128,400 amount and were therefore not subject to the tax. That’s close to $88 billion in taxes that could be collected if there was no cap on earnings subject to social security tax. Without having to reduce or eliminate social security benefits to retirees and without having to take money from any other budget item in the federal government, one available option is to adjust the tax code so that the limit on earnings that subject to social security tax is increased to an amount where there is no longer a deficit between the amount being paid out and the amount being collected.