More than 90 percent of American workers pay Social Security taxes on all their earnings, but it’s the less than 10 percent of wealthy American workers who have not had to pay Social Security taxes on all their earnings which has led to $1.2 trillion escaping Social Security taxes, according to a recent report from The Motley Fool.
Because Social Security has an earnings cap that limits how much income can be subjected to Social Security taxes ($128,400) in 2018, wealthy Americans avoid paying Social Security taxes on all their earnings. This is not scheme or a tax loophole, it’s the law and not the fault of wealthy Americans, but it has resulted in $900 billion less each year in income to be taxed by Social Security since 1983 when about $300 billion was escaping Social Security’s grasp.
One of the reasons the amount of income untaxed by Social Security has increased so substantially in the last 35 years is income inequality. The wealthy have seen their incomes continue to increase substantially, but the middle and lower income classes, not so much.
There are two results that have occurred from all this income being untaxed by Social Security that are alarming. First of all, the wealthy, even though they don’t pay Social Security taxes on all their earnings, are collecting more benefits than people with lesser incomes. This is because wealthier individuals tend to live longer than low-income Americans and go on collecting benefits much longer. The other result is that if you taxed all of these earnings going back to 1983, and didn’t have trillions escaping taxation by Social Security, there would be no projected shortfall of the Social Security reserves that we are expected to see by 2034 when Social Security will be unable to meet 100 percent of benefit obligations for the first time.
