7 Reasons Social Security Is in Big Trouble

I’ve only quoted number three on this list from the Motley Fool article because it’s the one that is terribly misleading. You can read the other six at the link below.

3. Income inequality If you’re looking to blame the wealthy for this mess, you do actually have a case. You see, the aforementioned program workhorse, the 12.4% payroll tax on earned income, is applicable on earnings (wages and salary, but not investment income) of up to $132,900 in 2019. This “cap” usually rises every year in step with the percentage increase in the National Average Wage Index. The exception is when the cost-of-living adjustment is negative, which has happened only three times since 1975.

The problem is this: More than 9 out of 10 workers will earn less than $132,900 in 2019, meaning they’re being taxed on every dollar they earn. Meanwhile, the single-digit percentage of workers who’ll earn above $132,900 have every dollar beyond this figure exempted. That means millionaires — or even billionaires like President Trump — could have most of their income exempted from payroll taxation. The Social Security Administration estimates that $1.2 trillion in earned income escaped taxation in 2016, costing the program nearly $150 billion in lost revenue.

Source: 7 Reasons Social Security Is in Big Trouble

What’s wrong with this analysis? Well, to begin with earnings above the tax cap are not counted toward the Social Security benefit calculation so the use of “exempted” applies to both the earning and the benefits that are Social Security costs. This method of funding is not new and has all been considered in the actuarial estimates for funding Social Security. The real problem is the shrinking number of workers relative to the number of Americans collecting benefits. There is no lost revenue because the program should be able to operate as the law is written.

As far as millionaires and billionaires go, the vast majority of their income is not earned income as defined by the law, but rather dividends, interest and capital gains… again nothing new. It doesn’t count for taxes and it does not count for a benefit calculation.

Social Security has been headed for “big trouble” for decades. It has little to do with inequality or the increase in the wealthy. The Trustees have been warning of the coming crisis and urging action to address it for decades.

Here is what the Trustees said back in 2000, twenty years ago:

With the retirement of the “baby-boom” generation starting in about 2010, OASDI costs will increase rapidly relative to the tax- able earnings of workers. By the end of the 75-year projection period, the OASDI income rate and cost rate are estimated to reach 13.3 and 19.5 percent, respectively, under the intermediate assumptions, resulting in an annual deficit of about 6.1 percent. Thus, annual tax revenue would be sufficient to cover only about 2/3 of annual expenditures at the end of the 75-year period.

Note this is long before we became obsessed with billionaires, inequality or the politics trying to change Social Security from its intended purpose and funding mechanism of self-sustaining.


  1. There are 536 reason why social security is in big trouble. I’ll break it down to just three major areas: the House, the Senate, and the President. Some additional subgroups maybe due to vote buying and lobbyists.


  2. “As far as millionaires and billionaires go, the vast majority of their income is not earned income as defined by the law, but rather dividends, interest and capital gains…”

    Then there should be no problem taxing the wealthy workers total earned income, right? Wrong, like all tax law it has unintended consequences. No matter what the cap on wages for FICA, employers will limit wage compensation to reduce the FICA taxes paid. IE – Lower wages period, Company provided car, Stock options, medical coverage, Payments to partners of a partnership, Employer contributions to qualified retirement plan. Or many will pay you as a subcontractor as many do today and then the FICA tax is the self-employed person’s responsibility to pay.

    The FICA tax has not been raised since 1990 and that is the problem. If you live long enough while collecting social security benefits (8 to 10 years) you will have collected everything that was paid in FICA taxes, during your working years, who pays for years 11+? I started collecting SS benefits at age 62 and will have everything paid in FICA taxes back in just 6 years., at age 68, adjusted to 2019 dollars. There is nothing wrong with the current social security system, if funded correctly through taxes. It has kept millions out of poverty for the last 80 years. Congress has failed to act to fund the coming SS shortage and I am planning on a 25% cut in benefits sometime in the early 2030s. I look at it this way, the cut will just be the government taking back 10 to 15 years of COLA increases. At least the cuts, if they come will not reduce my SS benefit to zero and I will not have to pay income taxes on my SS benefit.

    Liked by 1 person

  3. Social security has always been a program designed to replace earned income. It is only recently that we have seen migration away from that focus – starting in 1983, continuing with President Clinton’s 1993 change regarding FICA-MED, the income surcharges for Medicare Part B and Part D, and the income surcharge for Medicare added by Health Reform. Nothing wrong with those changes, and others proposed by D’s going forward, if you believe in changing Social Security and Medicare into a form of welfare – that does not relate to taxes paid. Just be honest about it. Confirm that you believe Americans are entitled to a certain level of money – regardless of whether they paid their “fair share” (however, you want to define fair). As I mentioned before, the benefits received from Social Security and Medicare often have very little relationship to the taxes people actually paid. For example, I am in my 50th year of paying Social Security and Medicare taxes, however, I qualified for non-contributory Medicare after 10 years, and, now that I am in my 60’s, I find that my current years of income won’t be part of my 35 year average for calculating Social Security benefits.

    These idiots want to increase the disparity between taxes paid and benefits received. And, they want to convince you that somehow, you “earned” these entitlements that others should pay for, that you have a right to others income and wealth.


    1. No one has paid for their Social Security and Medicare benefits that they will receive over a lifetime, if they collect benefits for over 10 years, that is a fact Jack. Current workers and employers pay for 90% of our benefits.


      1. I agree. When I received benefits, it is from taxes on wages paid at this time. Today, that still includes me. Tomorrow, it won’t.

        However, I disagree with your comment regarding “paid for”. Unlike most Americans, I have been paying into the system for nearly 50 years. And, adjusted for my employer’s contribution (which negatively impacted my wages), for the time value of money (earnings that would have accrued on the contributions I and my employer made), as well as general revenue taxes I paid to fund Medicare Part B and Part D benefits for the generations that went before me, plus all of the payroll taxes I paid, FICA and FICA-Med, as well as Part B and Part D and IRMAA premiums I will pay in retirement (once I start Part B and Part D), I have CERTAINLY caused contributions and accumulations in both Social Security and Medicare that far exceed the benefits I will receive – even if my spouse and I both live to be 100. I’ve done the math.

        Yes, certainly, there isn’t money in the trust fund today left over from the taxes I and you and others paid, that will cover the benefits we will receive. Congress spent them. They used them to buy votes from the greatest generation and the silent generation. Consider the first beneficiary from social security. Ida May Fuller worked for three years under the Social Security program. The accumulated taxes on her salary during those three years was a total of $24.75. Her initial monthly check was $22.54. During her lifetime she collected a total of $22,888.92 in Social Security benefits (she lived for 35 years in retirement, until reaching 100). .

        The problem now is whether we are all stupid enough to elect D’s who will offer to increase benefits to those who did not pay as much in taxes as a means to buy more votes – sending the bill to those too young to vote and generations yet unborn.

        The point is, someone has to pay for this stuff, these promises. I’ve paid, and paid, and paid!


  4. Thanks for the info/opinion…why shouldn’t dividends, interest and capital gains be taxed and/or considered taxable for the purposes of SS? It is “earned”, albeit not as a wage…I don’t understand why the States and the Feds take 50% of lottery winnings, but don’t tax the wealthy on their “un-earned” windfalls…there is definitely in-equility in the system that seriosuly favors the have’s over the have-nots…


    1. Well, that could happen, but then would those earnings be counted in determining the Social Security benefit? To be fair they should. But then there would be controversy over some people receiving high SS benefits. All would be fine is the taxable wage base and the tax rate had been very gradually adjusted over many years as urged by the Trustees. Lottery winning are taxes as ordinary income, so the highest federal tax is currently 37%, some states don’t tax or partially tax their own lottery winnings. Why do you call dividends, etc. windfalls? What about when their capital gains turn into losses? Interest is taxed as ordinary income, some dividends and capital gains are taxed lower so you could argue that once a certain income level is reached, that tax break should disappear. But in my opinion Social Security should stick with the original concept, self-sustained by workers and employers with the benefits based on earnings (even though lower income receive a higher relative benefits). I would make one change though. Employers that do not contribute toward a retirement plan or that do not meet some minimum should contribute and extra amount toward Social Security.


  5. you wrote As far as millionaires and billionaires go, the vast majority of their income is not earned income as defined by the law, but rather dividends, interest and capital gains… again nothing new. It doesn’t count for taxes and it does not count for a benefit calculation.

    If Biden is elected that all changes. The tax policy he wants to implement taxes all capital gains in the years they are made, not when the security is sold.


  6. As I have repeatedly confirmed in notes here on this blog, the only thing more regressive than the taxes people pay for Social Security and Medicare benefits are the benefits folks receive. An individual reaching age 65 today, could have paid less than $800 in FICA-Med over the past ten years to qualify for non-contributory Medicare Part A coverage, and if he had earnings that low, he would likely qualify for Medicaid and Medicare which would make his Part B and Part D coverage non-contributory, with no cost sharing as well. For comparison, over a 50 year period, between myself and my employers, we have contributed well in excess of $200,000 in FICA-Med. There is no cap on wage earnings subject to FICA-Med,and post Health Reform, there is now a FICA-Med surcharge, just as there are Income Related Monthly Adjustment Amount surcharges for Medicare Part B and Medicare Part D.

    With respect to Social Security, the formula and bend points clearly replace a much higher level of income for individuals with lower wages, and the use of the 35 year average, that includes years with no wages (such as for child care, unemployment, etc.) means that the benefit is highly progressive relative to the taxes each person pays.

    The D’s want to increase the benefits to buy your votes (some R’s too!). For example, George W. Bush did it to win re-election in 2004. However, the argument that these programs favor those with high incomes or those who are wealthy (yes, Virginia, those are two different groups) is just another lie.

    President Obama and Vice President Biden were in office for 8 years, during which they did nothing to reduce the Social Security and Medicare underfunding, while concurrently doubling the national debt. Want to give them a chance to do it again? If so, vote for the D’s for the House, Senate and Presidency – they will increase the taxes people who are deplorable, people who cling to their guns and religion will end up paying, so they can spend even more in their attempts to buy votes, while further increasing the deficit


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