Updated Jan 20, 2023 - Economy

Rising income inequality is draining billions from Social Security

Data: Source: Social Security Administration via Economic Policy Institute; Chart: Axios Visuals

Because of rising income inequality, the share of Americans' incomes that are subject to the Social Security tax is at a nearly 50-year low, per a new report from the progressive Economic Policy Institute.

Why it matters: The decline translates to billions of dollars lost that could go to shore up Social Security, which is on an unsustainable long-term footing, as Axios Macro's Neil Irwin has written.

How it works: This is all about the 6.2% payroll tax (aka FICA) on workers' gross income. These taxes are not collected on earnings after a certain maximum.

  • In 2022, that maximum was $142,800. The cap gets re-set each year based on wage growth: This year it's $160,200. Only about 6% of wage earners — around 11 million workers — make more than that cap.
  • Theoretically, increasing the cap each year should mean that the share of earnings subject to the tax remains level. But because incomes at the top have risen rapidly over the past few decades, there's more money coming in over that cap — and it's not getting taxed, as Congressional Research data noted in 2021.
  • "Income inequality has really done a big number on Social Security, "said Nancy Altman, co-founder of Social Security Works, a nonprofit that advocates for protecting and expanding the benefit.

By the numbers: Each percentage point drop in the share of earnings subject to the Social Security tax reduces tax revenue by $12.6 billion, EPI estimates.

Zoom out: It seems contradictory to note this since Social Security is a crucial poverty-fighting program, but Social Security taxes are actually more burdensome for lower-wage earners. Plus, those who exceed the cap wind up paying a lower tax rate:

  • Someone making $160,000 a year pays 6.2% in Social Security taxes, while someone earning $320,000 pays 3.1%.
  • The idea behind this is that Social Security is insurance that you buy to replace your income in case of disability, and in the event of retirement. And higher earners presumably can take care of this expense themselves.
  • Congress in the late 1970s set a goal of taxing 90% of earnings, not all earnings.

What they're saying: Altman and others propose changes. A few bills seek to eliminate the cap or rejigger it in other ways.

  • Opponents of raising the cap argue that it would discourage work and "weaken the link" between what individuals pay into the system and what they get out of it, the nonpartisan Peter G. Peterson Foundation notes.

Correction: Thursday's item mistakenly identified the Peter G. Petersen Foundation as a conservative institution. It is nonpartisan.

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