It is the first work week of 2022 and 358 very special American workers already paid their Social Security taxes, or FICA (at least if 2020’s numbers are any guide). Because they make more than $50 million a year, they hit the Social Security cap sometime in the first working day of 2022.
Some American workers earn so much they stopped paying FICA taxes during their first bubble bath of the New Year.
This extraordinarily small group of employees, who earn an average annual salary of around $46,000 per hour, will stop paying Social Security’s FICA taxes (12.4% of pay split evenly between employers and workers) sometime on Monday. They earn the Social Security tax cap of $147,000 in just a few hours. After their first $147,000 of earnings, high-income workers stop paying into Social Security.
Only 6% of American earners typically earn more than the Social Security earnings cap and most of those fall in the $150,000 to $400,000 range. About 8 million workers make more than the Social Security earnings cap and 7.4 million earn between $150,000 and $400,000. Most of these workers and their employers will stop paying FICA in the summer or fall, not the first days of the New Year. The vast majority—94%—of the 168 million American workers and their employers will pay the FICA all year long.
Most people don’t post their salaries, so I don’t know who the highest paid person in America is. Only public companies regularly post the salaries and bonuses for its executives so I know Larry Culp, CEO of General Electric
In 2020, over 167 million workers paid $856 billion into the Social Security retirement system. The 6% of workers who make more than the cap earned 41% of the wages and salaries. If all of their earnings had been taxed in 2020 Social Security’s revenue would have jumped to roughly $1 trillion.
If the very highest earners in our economy paid more Social Security tax, the system would be in better shape and the economy would be much fairer. But that would mean raising the Social Security earnings cap.
Raising the Cap is Fair
Social Security plays a crucial role in narrowing retirement wealth inequality between the rich and the poor. Yet it was not the intention that so many Americans would escape FICA, according to Kathleen Romig of the Center for Budget and Policy Priorities. The unprecedentedly lopsided growth in earnings over the past few decades is the main reason for the Social Security system’s shortfall.
The Economic Policy Institute reports most of American workers’ earnings growth since 1979 has gone to the top earners; the top 1 percent wage grew 179% since 1979, while wages for the bottom 90 percent grew only 28%.
The people who earn over the cap have done better than anyone else in terms of pay, wealth, and health. Those who would pay more tax have had the largest increases in healthy life expectancy. As the Urban Institute’s Melissa Favreault notes, asking more from affluent workers will help right another inequity—the one caused by income-based longevity gaps (which were made much worse by the Covid-19 pandemic).
Raising The Cap Would Help Most Americans’ Retirement Security
It is not surprising that, according to a National Academy of Social Insurance survey, 77% of Americans feel it is critical to preserve Social Security benefits for future generations, even if it means raising taxes. Raising the cap would help the system pay full promised benefits. Social Security’s revenue shortfall is such that in 12 years Social Security will pay only 78% of promised benefits if nothing else changes. The Congressional Research Service reported if the earnings cap was eliminated entirely and benefits for the highest earners were not increased, the extra revenue would solve the longer term financial gap for 35 years.
Raising the cap could also bring in more revenue to help fund a special minimum benefit that would eliminate elder poverty, according to the Urban Institute’s C. Eugene Steuerle and Karen E. Smith.
Congress Has A New Plan to Raise The Cap and Save Social Security
In October 2021, Representative John Larsen (D–CT) introduced a comprehensive plan to save Social Security and eliminate elder poverty. A key element is raising the cap. Larsen’s bill—“Social Security 2100: A Sacred Trust—is the most recent plan of many other lawmakers and advocacy groups (See Table E2 in this Social Security report) to reform Social Security by raising revenues and expanding benefits. It is extraordinary that there is little call for shrinking benefits, since most reforms used to be to split cuts and revenue increases evenly.
Bipartisanship can rule the day to solve the pressing social and humanitarian problem of financially harsh old age. As Economist Kathleen Romig notes, Republicans and Democrats have come together before to solve big social insurance problems. In 1994, a bipartisan group of politicians eliminated the Medicare earnings cap. Since then, everyone pays Medicare taxes all year long. And since 2016, higher earners pay a surcharge and there were no complaints from the rich.
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