Aug 14, 2024
Social Security is one of the most popular government programs in the United States, with broad support from Americans of all political stripes. An estimated 70.6 million Americans receive benefits from it, including both the wealthiest and the poorest retirees.
But sadly, Social Security is in trouble. Its trust fund is expected to run short in 2035, potentially necessitating a 17% cut to benefits that could devastate vulnerable seniors.
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With the program facing an impending financial crisis, some critics have suggested the rich shouldn't get benefits, should get lower benefits or should be taxed more without an increase to their benefits.
While these ideas may seem good on the surface, the idea that the wealthiest Americans should no longer receive Social Security raises some serious concerns.
Social Security's strength comes from being an earned benefit
The biggest argument against ending Social Security benefits for the rich comes from its enactor, former President Franklin Roosevelt. Roosevelt made it very clear that he did not want his program, the Social Security Act, to be seen as a welfare benefit. Instead, he believed firmly that the program — part of the New Deal — would be more durable if it was an earned benefit.
Roosevelt structured it so it was funded by payroll taxes, rather than from general income taxes. Under this system, workers receive benefits equal to a percentage of what they pay from their cheques. He believed this would create "a legal, moral and political right to collect their pensions." He did this because he felt it would strengthen Social Security, stating, "With those [payroll] taxes in there, no damn politician can ever scrap my Social Security program.”
If rich people were asked to pay into Social Security but no longer receive the benefits of it, this would violate Roosevelt's argument that Social Security is social insurance instead of a welfare check. It would fundamentally transform the program and likely erode its popularity over time.
Introducing means-testing into the program also:
- Adds complexity
- Makes it more difficult for people to access benefits due to bureaucratic red tape
- Incentivizes "gaming the system" to qualify for benefits or avoid taxes
- Opens up debate of exactly who is so rich they should be asked to pay a 12.4% payroll tax on their income for retirement benefits they'll never receive
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Is cutting benefits for the rich a solution to Social Security's shortfall?
The counter-argument, of course, is that the richest Americans don't need Social Security while the poorest do. After all, Warren Buffett could get by without his benefit check, but seniors living close to the poverty level can't afford a 17% cut to benefits that could come if the program's finances remain unstable.
It's undoubtedly true that discontinuing benefits to the wealthiest would leave Social Security with more money. However, it's an open question as to whether that's a viable long-term solution.
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There's no clear data on what would happen if rich people received no benefits at all, as no lawmakers have proposed this as a solution to Social Security's shortfall. However, proposals to reduce Social Security benefits for high earners have been considered.
One option is to have Social Security replace a smaller percentage of income as earnings increase. The benefits formula already does that, replacing 90% of average earnings up to a threshold called a bend point, then 32% up to a second "bend point," and finally replacing just 15% of earnings above that limit.
The economic think-tank Congressional Budget Office argues for additional bend points at higher income levels so the richest Americans see even less of their income counted in the calculation of their benefits.
Another proposed solution is to tax higher earners more without increasing benefits. Under the current system, there's a cap — called the wage base limit — on the amount of income subject to Social Security tax. Income earned above the cap isn't taxable and doesn't count when determining average wages used to calculate benefits.
Some have suggested eliminating that cap with no corresponding benefits increase. Higher earners would be taxed on all their earnings instead of only a portion up to the wage base limit. But income above that threshold still wouldn't count in their benefits calculation even though they were taxed on it.
Research done by the Manhattan Institute has shown that eliminating the cap would close only half of Social Security’s long-term shortfall, while adding a new bend point would affect the long-term economy as people adjusted their behavior in response to policy change.
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Christy Bieber has 15 years of experience as a personal finance and legal writer. She has written for many publications including Forbes, Kilplinger, CNN, WSJ, Credit Karma, Insurify and more.
