Let the Propaganda Begin

Jan 5, 2024 / By Elaine Floyd, CFP®

A Marketwatch article, This Will Not Save Social Security, tries to make the point that raising the tax cap will not save Social Security. It reads like an effort to manipulate public opinion.

As discussions ensue about the best way to bring the Social Security system into actuarial balance, the raising of the maximum wage base is emerging as a popular solution. In 2024 wages up to $168,600 are subject to the 12.4% Social Security tax, with the employee and employer each paying half and self-employed individuals paying the full 12.4%. Wages over $168,600 are not taxed and are not counted as earnings for the benefit formula.

One important rationale for raising the wage base is that when the 1983 amendments were passed, solvency was assumed based on 90% of wages being under the wage base and therefore subject to the Social Security tax. Now, because of growing income inequality, the percentage of wages under the wage base has fallen to 82.5% (reference: Steve Goss presentation, December 2023). This means 17.5% of wages are not subject to Social Security tax. Raising the wage base—to the point where 90% of wages are being taxed, or even eliminating the wage base altogether—would add substantial tax dollars to the Social Security trust fund and go a long way toward restoring solvency.

High earners are naturally resisting this. But it’s one thing to object to paying higher taxes and another thing to distort the facts in an attempt to sway public opinion. The subtitle to the Marketwatch article is “Removing Social Security’s taxable wage cap doesn’t help very much,” going on to make the case that “the limit on [Social Security payroll] taxes also serves as a limit on [Social Security] benefits. Without this limit, higher wage workers would pay unlimited taxes and receive unlimited benefits. The additional benefits would offset much of the additional taxes.” The example given is for a person making $1 million: Under the current benefit formula this high earner would be entitled to a monthly benefit of $14,289, leading one to the conclusion that it’s pointless to raise the wage base because all or most of it would be paid out in benefits to high earners.

The article downplays the more common notions about the raising of the wage base: That benefits would NOT be raised commensurately. While it’s true that there has always been a link between earnings and benefits and to break that link would represent “a fundamental departure from Social Security’s tradition of linking both contributions and benefits to taxable wages,” most of the proposals call for a tweaking, not a breaking of the link.

A comprehensive list of proposals and their estimated effect upon the system can be found on this page, provisions affecting payroll taxes. Provisions E2.1 through E3.19 analyze many different ways the raising of the tax cap could take effect and how the additional earnings would figure into the benefit formula. For example, E2.4 would create a “secondary PIA” which would incorporate the higher earnings but at a reduced rate. There are many ways the benefit formula could be tweaked to both give credit for all earnings while adding to Social Security’s revenues. To assert that such tweaking would “break” the connection between contributions and benefits or imply that it’s too difficult to figure out appears to be an attempt to manipulate public opinion.

Be careful out there. The political rhetoric is likely to ramp up in 2024. Try to keep a clear head and separate political discourse from the practical work of helping clients reach their goals.

As director of retirement and life planning for Horsesmouth, Elaine Floyd helps advisors better serve their clients by understanding the practical and technical aspects of retirement income planning. A former wirehouse broker, she earned her CFP designation in 1986.



I do have a question...if that article is manipulation of public opinion, what would you call attributing to "income inequality" the fact that 7.5% more workers are now above the wage base? That is a number that refers to millions and millions of people moving from middle class to upper middle class or upper middle class to upper class, so what would progress look like and how would it look different than income inequality?

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