Why Millionaires Are Already Done Paying Social Security Taxes in 2023
If you earn $1 million or more a year, congratulations: You have already fulfilled your Social Security payroll tax obligation for 2023 — and it’s still only March.
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It only took two months for millionaires to have all Social Security payroll taxes deducted from the paychecks, according to the Center for Economic and Policy Research (CEPR). The reason is simple: Social Security is taxed only on the first $160,200 of your annual income. This means that someone whose paycheck is $83,333 a month – or $1 million over the course of a year – stopped contributing to Social Security taxes on Feb. 28, 2023.
Most Americans will pay Social Security taxes throughout the year. The median income in the United States during the 2022 fourth quarter was $1,085 a week, according to the Bureau of Labor Statistics. That translates into $56,420 a year or $4,340 a month. The typical American worker would need to nearly triple their annual salary to reach the maximum Social Security earnings threshold.
Most of the Social Security Administration’s funding — around 75% — comes through payroll taxes. This includes a 6.2% payroll tax that workers pay, plus another 6.2% that employers pay (self-employed people have to pay the full 12.4%).
As the CEPR noted in a recent blog, 94% of U.S. workers are paid less than $160,200 per year, so they pay the 6.2% Social Security payroll tax on all of the paychecks they receive in 2023. For millionaires, only about 1% or less of their total earnings go toward Social Security.
“Despite earning much more than the average worker, a millionaire’s effective tax rate is far lower than the average worker’s,” the CEPR stated. “As a result, the burden of supporting Social Security falls most heavily on working-class and middle-class people.”
Social Security’s other funding source — the Old-Age and Survivors Insurance (OASI) Trust Fund — is expected to run out of money as early as 2032. When that happens, the program will be solely reliant on payroll taxes for funding, which might cover only about three-quarters of benefits.
One reason the OASI is getting depleted is that many of the baby boomers who once paid into Social Security are now retired and receiving benefits themselves. Another reason is that a larger percentage of Americans are earning above the payroll tax cap.
When the cap was implemented in 1983, only 10% of earnings exceeded it and went untaxed, according to the CEPR. By 2021, that figure had risen to 18.6%. The ongoing upward income redistribution has shifted more earnings out of range of Social Security’s supporting tax.
One way to address the problem is to raise the payroll tax cap — something many Americans support.
As previously reported by GOBankingRates, more than 80% of Americans (79% of Republicans and 88% of Democrats) are in favor of applying the Social Security payroll tax to more wages. Taxing all wages above $400,000 would eliminate 61% of the budgetary shortfall.
Some lawmakers have proposed taxing Social Security on higher wages. A bill authored by U.S. Rep. John Larson (D-Conn.) last year would increase the maximum taxable earnings to $400,000 a year and hike annual average benefits by 2%. The bill, called “Social Security 2100: A Sacred Trust,” had 200 co-sponsors in the U.S. House last year, when Democrats controlled the chamber and Larson was chairman of the House Ways and Means Social Security Subcommittee. With Republicans now in control, however, it’s unlikely the bill would move forward.
A similar bill proposed in 2022 is the Social Security Expansion Act, sponsored by Sen. Bernie Sanders (I-Vt.), Sen. Elizabeth Warren (D-Mass.) and Rep. Peter DeFazio (D-Ore.). It aims to extend the solvency of the trust funds by 75 years by raising the maximum taxable earnings to $250,000 a year. It also proposes to raise Social Security benefits by $200 a month and require individual millionaires and billionaires to pay a 12.4% tax rate on Social Security, up from the current 6.2% individual rate.
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But again, the GOP-led U.S. House would be unlikely to support such a measure.
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This article originally appeared on GOBankingRates.com: Why Millionaires Are Already Done Paying Social Security Taxes in 2023
