22% Benefit Cut Looms In 2032

Eliminating the Social Security Payroll Tax Cap Would Fund Social Security

The payroll tax is a flat tax on wages with a ceiling. It takes 12.4 percent of the first dollar a home health aide earns and stops at $184,500 in 2026. A CEO pays their whole year’s Social Security tax before they go to bed on New Year’s Day. And only what is called narrowly called “wages “is taxed. A hedge fund partner pays the tax on a sliver of their income and pays nothing on their dividends, capital gains, or carried interest. Raising the rate on that base would close the gap, but it asks the secretary to pay for a debt they did not create.

Better still, leave workers’ rates alone and expand the base to all forms of compensation and to investment income, the income that has escaped the program for nine decades. The Roosevelt Institute’s Stephen Nuñez wrote that the trust fund’s troubles reflect a deeper failure: “the economy is failing to support Social Security.” Demographics were forecast with precision back in 1983. What broke the math was inequality, which pushed an ever larger share of national income above the cap and into capital income the tax never sees.

Ida May Fuller And Social Security’s Legacy Debt

Meet Ida May Fuller, a legal secretary from Ludlow, Vermont, and the first person to receive a recurring monthly Social Security check. She worked under the program for about three years and paid $24.75 in payroll taxes. Her first check, dated January 31, 1940, was $22.54, nearly her whole lifetime contribution in one envelope. She lived to 100 and collected $22,888.92.

Ida was not gaming anyone. The program was built to pay her. Checks went out almost at once to people who had never worked a full career under the system, because lifting the Depression era elderly out of poverty could not wait 40 years. That humane choice created a bill that never went away.

Economists Peter Diamond, a Nobel laureate, and Peter Orszag named it the legacy debt: early cohorts received benefits far beyond what their contributions plus interest could finance, and every later generation of workers carries the difference. Diamond and Orszag estimated that 3 to 4 percentage points of the 12.4 percent payroll tax service this inherited obligation. Cohort transfer estimates by SSA’s Dean Leimer’s article in the Social Security Bulletin, sized the debt at about $20.9 trillion for cohorts born through 1949, equal to 5.0 percent of future taxable payroll.

Set those figures beside the new 4.42 percent deficit and the picture changes. A big share of the gap is not modern excess. It is starting debt because of Ida’s cohort still circulating. Another major cause of the debt is growing wage and wealth inequality.

Taxing Investment Income Would Fund Social Security

Taxing investment income is also not a new or radical idea. Here is the lost history. The architects expected the whole progressive tax system to help pay it. The 1935 planners projected a general revenue contribution by the 1960s, and Congress made it law in 1943, when the Murray amendment to Section 201 of the Social Security Act authorized general revenue appropriations to the trust fund whenever payroll taxes fell short. The provision was repealed in 1950, when the payroll tax rate finally rose. Reaching beyond wages was the plan all along.

Un-repeal the 1950 amendment and remind Congress Republicans and Democrats once wanted general revenues to fund Social Security.*.

Three Bills Already Tax Investment Income

The serious reform bills have rediscovered a way to broaden the base to fund Social Security.

Senator Whitehouse and Representative Boyle wrote the Medicare and Social Security Fair Share Act which applies the 12.4 percent tax to earnings above $400,000 and, the part everyone misses, to net investment income above $400,000, with the money flowing straight to the trust funds. The SSA Chief Actuary scored it as reaching sustainable solvency for the full 75 years; the investment income piece supplies nearly half the fix.

Senator Bernie Sanders’s Expansion Act draws on wages and wealth. It reapplies the 12.4 percent payroll tax to earnings above $250,000 and taxes investment income — the capital gains, dividends, and business income that make up most of what the very rich take home.

Representative John Larson, who has carried his Social Security 2100 Act in every Congress since 2014, taxes both bases and closes nearly 90 percent.

One caution: every score predates Tuesday’s larger deficit, so each bill now closes somewhat less than its headline. The direction holds.

None of these bills cuts benefits, and none should. Employer based pensions are barely adequate and working longer makes no practical sense. Means testing benefits, as superficially attractive sets a silly precedent to not pay insurance payments to people because they have high incomes?. Should we means test auto insurance or house insurance payouts. Let the income tax compress incomes. The right instrument for recovering money from rich retirees already exists. It is called the progressive income tax. Kathleen Romig of the Center on Budget and Policy Priorities drew the same conclusion from the new report: “policymakers should start with those with higher incomes and wealth.”

Social Security Benefit Checks Are Economic Infrastructure

Social Security is not just a promise. It is infrastructure. Benefit checks supported more than 12 million jobs in 2023, and they keep arriving when the labor market sours, propping up older laid off workers, grocery stores and pharmacies in every county through every recession. An automatic 22 percent cut in 2032 would be a permanent demand shock aimed at the local economies least able to absorb one. Financing the program from capital income avoids that shock without raising taxes on a single paycheck, which preserves the work incentives that growth depends on.

Ida May Fuller’s first check was $22.54. The bill arrived 86 years later, and it can be paid without touching a worker’s wages.