The Social Security system is facing a funding shortfall by 2035, potentially leading to a 17% reduction in benefits. Alex Lawson from Social Security Works highlights income inequality as a major contributor to this issue, noting that much of the income in recent decades has accrued to those earning well above the $168,000 Social Security tax cap. Raising the taxable income cap to $200,000 or $250,000 may offer a short-term solution but doesn’t address the structural problem of wealth accumulation among the ultra-wealthy, whose income often comes from investments rather than salary. This situation suggests potential future tax increases to address the shortfall, but significant action from Congress is unlikely until closer to the deadline.

Transcript:

We’ve talked about the 2035 funding shortfall that Social Security expects, at which point it is estimated they’ll have to pay out dramatically reduced benefits.

So, Austin, my question is, what’s going on in this overriding situation about the Social Security shortfall?

And also, what’s this billionaire problem that some are arguing is the main contributor to it?

Right.

So Social Security Works Executive Director Alex Lawson explained that there’s a funding problem.

And he would know, he works for a firm that focuses on Social Security benefits for seniors.

And by their own forecasting, benefits would be automatically cut by 17% in 11 years due to funding shortfalls or expected funding shortfalls, I should say.

There is some time to solve that problem.

But Lawson points out income inequality as the main issue here.

Now, we should say, Lawson isn’t exactly without his own bias here.

The organization he represents is interested in strengthening Social Security, not necessarily finding other avenues to support seniors in retirement.

But nonetheless, he does bring up a good point. The data is still valid.

So Americans pay Social Security taxes on up to $168,000 a year of income.

Anything earned above that is not subject to Social Security taxes.

And as Lawson has pointed out, with so much wealth since the 1980s accruing above that payroll cap, the productivity gains have gone to the ultra-wealthy.

And as he would describe it, in short, we have a billionaire problem.

If the majority of income accrues to the top 1% or 0.1% of individuals, it is way above that $168,000 taxable threshold.

It’s all incremental gains to them that is not taxed for the benefit of Social Security.

Now, we believe that that $168,000 cap will almost certainly be raised to cover shortfalls, but it doesn’t entirely solve the problem.

If you raise it to $200,000 or even $250,000, it’s a short-term fix, but there’s going to be another funding shortfall.

And it doesn’t really address the structural issue of so much wealth accumulating well above those bands, above a million dollars a year or even $5 million a year.

So there’s also another problem with this approach that is worth pointing out.

Most billionaires and even millionaires don’t earn their income from salary anyway.

So even if you do raise that cap from $168,000 to $200,000 or $250,000, most of the gains in their wealth come from investments in equity, which largely accrue tax-free until sold.

So there has been a lot of talk about taxing unrealized gains on investments.

That’s going to carry its own issues and challenges that we can’t unpack here.

But the long and short of it is this. Social Security is forecasting a shortfall.

It’s a difficult time to raise taxes.

And although the income tax threshold is about $170,000, you push up to $200,000, you push up to $250,000, it’s only a short-term fix and it doesn’t solve the structural issue.

And if you push too much on taxes, what we have seen is that the tax-to-GDP ratio stayed roughly consistent around 30 percent for the last few decades.

And when you start to push much above that level, you actually hurt GDP, which in turn hurts future tax revenue.

So this billionaire problem, we have so much wealth accumulating way above that income threshold and really no good current way to tax it to fund Social Security.

Yeah, and I think a couple of important points here, Austin, is number one, Congress is probably going to wait until the last minute to address this problem.

So we’re looking at 2033, 2035 in that zone.

So if you’re collecting Social Security today, it’s highly unlikely we’re going to see some dramatic action.

But if you’re an earner earning income, just be aware that increasing taxes is one potential way to be able to solve this shortfall.

So if you’re expecting to be able to earn the same income and have the same tax rate, I would be very suspicious of that heading into the near future because within the next about 10 years, we’re going to need a fix to be able to resolve this situation.

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