The Day Million-Dollar Earners Get Richer by Stiffing Social Security
Photograph by Nathaniel St. Clair
The vast majority of workers in the United States pay income and payroll taxes on all of their earnings throughout the year. For most, this includes an ever-present 6.2 percent employee-side payroll tax for Social Security, the vital program that provides retirement, disability, and survivor benefits to millions.
On March 9, however, those with wage and salary earnings of a million dollars a year will be relieved of paying into Social Security for the remainder of 2026. This is because the Social Security payroll tax applies only to such earnings up to a fixed annual cap, known as the taxable maximum. The maximum is calculated each year by the Social Security Administration using a formula that adjusts it in proportion to the national average wage index. In 2026, the taxable maximum is $184,500. This cap effectively allows higher earners to retain more of their income, even as lower earners continue to contribute to this critical public benefits program throughout the year.
Why is it that those who are theoretically most able to pay get to stop doing so, while those with less are not afforded the same privilege? Many people mistakenly think of Social Security as akin to a personal savings account, where one should expect to receive more or less what one paid in. This misconception is used to justify things like the payroll tax cap — after all, if millionaires cannot withdraw beyond that cap, why should they continue contributing to Social Security? The problem is that this view fundamentally mischaracterizes how the program works.
Social Security ultimately functions like social insurance rather than government-enforced personal savings. In a social insurance system, workers and/or their employers contribute funds to a shared pool in exchange for income protection against common risks such as old age, disability, or the loss of a family breadwinner. The concept of a shared pool is reflected in Social Security’s intergenerational financing structure, in which contributions from today’s workers help fund benefits for current retirees. The purpose of social insurance is to ensure broad economic security among its participants, even in the face of common life shocks. The benefit formula is therefore intentionally progressive, replacing a higher share of earnings for lower-income workers. This structure is part of what makes it so successful as an anti-poverty program. Consistent with this design, Social Security benefits for higher-income retirees may also be subject to federal income tax.
Eliminating the cap on taxable earnings would better align the program with a core principle of social insurance — collective responsibility — while fortifying the program’s finances for current and future beneficiaries. This step is all the more crucial as upward redistribution has pushed an increasing share of earnings above the cap. In 1983, only 10 percent of earnings exceeded the cap, but by 2018, it was almost 17 percent.
To be clear, Social Security is in far less danger of imminent collapse than is often reported. Even with no changes to the program, for example, it should be able to pay out 74 percent of scheduled benefits in 2065. Meanwhile, many privatization proposals would shift risk onto individuals in ways that potentially benefit higher earners who stop paying into Social Security before the end of the year, while increasing risk for those already closer to poverty. Other proposed changes, such as increasing the retirement age, amount to a benefit cut for all retirees and would disproportionately harm working-class people, especially those in more physically demanding jobs. Both types of proposals ignore the simple solution that is most consistent with the public spirit of this public program: making everyone pay their fair share by eliminating the payroll tax cap.
This first appeared on CEPR.
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