According to an article in a recent issue of The Atlantic, the federal government — back in the day — underestimated just how rich rich would be in the 21st century. This underestimating has had effects on the solvency of social security.
Here’s the kicker:
If all of that income growth were taxed evenly, Social Security would have no shortfall. But it’s not taxed evenly: Any dollar that an American earns beyond $118,500 is, under current laws, not subject to Social Security taxes. In other words, someone who makes $118,500 this year is going to pay the same amount in Social Security taxes as someone who makes $4 million this year.
The authors of the article, take one stab at a solution:
The system can easily be made solvent if it adjusts to the reality of income inequality. Eliminating the earnings cap would be an effective, fair way to fully restore Social Security’s strength. Those affected by such a shift in tax policy would remain the richest handful of people in the country, and the move’s biggest effect would be that the retirement system for the bottom 99 percent of workers would be solvent for three generations. (And that’s only discussing the possibility of removing the tax cap on wages earned—every single dollar of capital gains is exempt from Social Security taxes too.)