Removing the Income Cap and Taxing Property Income: Two Easy Ways to Assure Social Security Solvency

The alleged long term shortfall in Social Security revenue can be easily remedied if the rich were required to pay taxes for the program based on their total incomes as they are required to for other parts of the federal budget such as defense. Right now they pay Social Security taxes on currently only the first $107,000 of their wage and salary income and nothing on their property income, which is the largest source of their total income.

As the below table indicates, for those earning under $100,000, about 79 percent of their Adjusted Gross Incomes come from wages and salaries. But for those receiving over $100,000, forms of property income – profits, dividends, interest, rents, etc. – make up increasing shares of AGI. At some point between $300,000 and $500,000 property incomes surpasses wage and salary income. As a result, those who receive more than $100,000 together receive a greater share of national income than under $100,000 earners but they collectively support Social Security less.

Table

Income Class and Tax Support for Social Security

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Adjusted Gross Income           % Income Subject to

                                                             Social Security Taxation

___[______________________________________________

Under $25,000                                             78.6

$25,000 under $50,000                              82.2

$50,000 under $75,000                              79.4

$75,000 under $100,000                            78.2

$100,000 under $200,000                          63.9

$200,000 under $500,000                          28.4

$500,000 under $1 million                         11.5

$1 million under $5 million                           4.0

$5 million under $10 million                       1.1

$10 million and greater                               0.3

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Source: Calculated from Internal Revenue Service, Table 1.4 “Individual Income Tax, All Returns: Sources of Income, Tax Year 2006, http://www.irs.gov/taxstats/indtaxstats/article/0,,id=134951,00.html#_pt11

The higher the income over $94,200 in 2006 – the last year for which full tax statistics exist – the greater the proportion of AGI that is shielded from Social Security taxation for two reasons. First Social Security taxes (6.2 percent for both the employer and employee) were collected on only the first $94,200 of wage and salary income. Second, no Social Security taxes are paid on property forms of income.

Social Security revenue could be significantly increased by removing the cap on wage and salary income and exposing property income to taxation.  Removing the cap, by my calculation, would have added $111.6 billion to the $677 billion collected that year – a 16.5 percent increase that would have been much more than sufficient to insure solvency. Revenue could have been enhanced a further $91.1 billion if enough of the nonwage income of those receiving over $100,000 was included so that at least 79 percent of their Adjusted Gross Income was exposed to Social Security taxation as is that of those earning less than $100,000.

These reforms would go far beyond insuring the current benefit levels of Social Security. They could and should be the first steps toward expanding Social Security benefits.

James W. Russell 

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