While most Americans are expected to pay Social Security payroll taxes throughout 2024, top earners with an annual wage income of $1 million will cease contributing to the program as of March 2. This abrupt halt in payments is due to the existence of a taxable maximum, which imposes a limit on earnings subject to the Social Security payroll tax. In 2024, this threshold stands at $168,600. Hence, individuals whose wages equal or surpass this amount will no longer have to pay into the program upon reaching this cap.
The taxable maximum undergoes annual adjustments based on variations in the national average wage index. While approximately 6% of workers have earnings above the taxable maximum since the 1980s, recent trends indicate a gradual increase in the percentage of total national earnings surpassing this threshold. This upward trajectory stems from the disproportionate growth in income for top earners relative to average wages, leading to a decline in the taxable maximum coverage from 90% of total national earnings in 1977 to 82% in 2022.
At its current trajectory, Social Security confronts an imminent funding shortfall. Should Congress fail to take action, the program will only be able to sustain full benefits until 2034, after which beneficiaries could face a minimum 20% reduction in benefits. To mitigate this impending crisis, lawmakers must consider implementing measures that could involve raising taxes, cutting benefits, or employing a combination of both approaches. Notably, a significant majority of voters across party lines prefer addressing the funding gap by increasing taxes on affluent Americans.
Several Democratic legislators have introduced bills aimed at bolstering Social Security’s financial stability. For instance, the Social Security 2100 Act proposed by Rep. John Larson (D-Conn.) and co-sponsored by 183 House Democrats seeks to reinstate the payroll tax for individuals earning over $400,000 annually while also taxing unearned investment income. Senators Elizabeth Warren (D-Mass.) and Bernie Sanders (I-Vt.) have championed a complementary proposal to subject income exceeding $250,000 to the payroll tax and impose a 12.4% tax on business and investment earnings, intending to fortify the program’s solvency.
While Democratic proposals strive to render Social Security benefits more generous while extending its longevity, obtaining bipartisan support remains a crucial hurdle. Republicans, who hold a sizable presence in Congress, must also endorse any tax increment, which may prove challenging given the differing ideological stances on tax policies within the two major parties. Nonetheless, voices such as Morris Pearl, a former BlackRock managing director and chair of the Patriotic Millionaires, advocate for increased taxation on the wealthy, acknowledging the need for equitable tax burdens among income categories.
Pearl emphasizes the necessity for individuals with investment income to pay comparable tax rates as those derived from labor income. Noting the preferential tax treatment of capital gains, Pearl asserts that such income sources are currently subject to lower tax rates than standard wages earned through labor. Furthermore, the Patriotic Millionaires coalition, comprising over 200 affluent individuals, supports the notion that higher-earning individuals should shoulder a larger share of the tax burden in alignment with principles of economic fairness and progressive taxation.
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