Tax Capital To Fund Social Security, Whether You Like It Or Not

Taxing Capital Helps Social Security Finances

It’s time more Republicans acknowledge this reality. The recent 2026 Social Security Trustees Report pinpoints 2032 as the year when every retirement and survivor check is cut automatically by 22% if Congress does nothing. The least costly and least distorting way to solve the entire financing gap is to extend Social Security’s base beyond paychecks to capital income — capital gains, dividends, interest and pass-through business income.

Taxing Capital For Social Security Has Three Main Advantages

Taxing capital avoids three calamities. One, pitchforks. Stanford historian Walter Scheidel’s “The Great Leveler” shows that across five millennia violence is the most common cause of reduced fortunes at the top. Ray Dalio reaches the same conclusion. Strained government finances combined with wide wealth gaps reliably predict internal conflict. Having Social Security benefits cut while the most common forms of income for the wealthy don’t pay into the system is the kind of optics that will see torches and pitchforks passed around all across the political spectrum. Owners of capital have more to lose from a benefits crisis than from a modest tax that prevents one.

Second, a benefit cut hurts the macroeconomy. Social Security benefit checks supported more than 12 million jobs in 2023, and they keep arriving when the labor market sours. A permanent 22% cut in 2032 would be a massive demand shock. The power of consumer spending that has propelled our economy through a decade of economic storms would suddenly have the piston stop firing.

Third, the U.S. already has among the highest old-age poverty rates in the developed world: roughly one in five Americans over 65 is poor by the standard measure, against an OECD average closer to one in seven.

Options For Social Security Revenue

So revenue it is. Here, Americans hold an underappreciated advantage: we are good at paying taxes. Of 38 OECD countries, the U.S. had the lowest rate of tax evasion — 0.5% of GDP, against an OECD average of 3.2%. Lower payroll-tax rates are the main driver of tax honesty.

First, we could raise the FICA tax. Though raising the FICA by 4.42 percentage points would close Social Security’s financing gap completely, it would risk pushing work off the books. Public finance economists rule of thumb is to broaden the base and raise the rates as little as possible.

Two, we could broaden the base by raising the tax cap, above which all income is exempt from Social Security payroll taxes. In 2026 the cap is $184,500. That means someone earning that monthly is done paying into the program by February. But nearly 96% of employees earn less and pay all year. And only what the law narrowly defines as “wages” is taxed at all — a hedge fund partner’s carried interest never sees a FICA form. Lifting the cap, as proposed by Warren and Moreno, doesn’t redefine wages.

Third, the other way we could broaden the tax base is include capital income.

Why Its Relatively Easy to Tax Capital For Social Security In the U.S.

There are three reasons to broaden the base to include capital income.

First, legacy debt. Early beneficiaries received far more than their contributions plus interest could finance. Ida May Fuller, the first recipient of a recurring monthly check, paid $24.75 in payroll taxes, lived to 100 and collected $22,888.92. Nobel laureate Peter Diamond and Peter Orszag named the result legacy debt; some third of the system’s obligations. Much of today’s wealth descends from legacy benefits of inheritance and returns on capital compounded across decades of peace and a stable workforce. Capital should help retire the debt it benefited from.

Second, reaching beyond wages was always part of the 1935 plan. Planners projected general-revenue contributions by the 1960s, and Congress made it law in 1943: the Murray amendment authorized general-revenue appropriations to the trust fund if payroll taxes ever fell short. It was repealed in 1950 only because the payroll-tax rate finally rose.

Third, practicality. Capital has had a spectacular five years; labor has had a raise. Someone who invested $100 in the S&P 500 in June 2021 had $172 — a growth rate of 72% — by May 2026, without lifting a finger. A full-time worker at the median wage gained about 24% over the same five years — by working. A broad, low-rate levy on investment income taps the base that both grew, one grew more significantly.

Bills in Congress to Broaden The Base For Social Secuirty

Serious bills [that would broaden the base to include capital gains] already exist. Senator Whitehouse and Representative Boyle’s Medicare and Social Security Fair Share Act applies the 12.4% tax to earnings and to net investment income above $400,000, with the money flowing to the trust funds and bringing the system to solvency. The investment-income piece supplies nearly half the fix. Senator Sanders’s Social Security Expansion Act requires people to contribute into Social Security on all of their wage income above $250,000, and on all capital income. Representative Larson’s Social Security 2100 Act taxes both bases and closes nearly 90% of the gap.

Yes, taxing capital discourages investment. All taxes discourage something. But the trade isn’t tax versus no tax. It is a capital levy versus a 22% benefit cut that shrinks demand and, if Scheidel and Dalio are a guide, eventually shrinks portfolios too.

Avoiding a benefit cut by increasing taxes is the strongly preferred choice across party lines. The National Academy of Social Insurance’s 2025 survey found 76% of Republicans and 93% of Democrats support higher taxes on “some or all Americans” to keep benefits from being cut.

Taxes remain unlovable. Cutting the one program Americans trust most would be worse — whether you like it or not.