I happened to be reviewing my own taxes over the years the other day. I am now retired, so my tax rate is lower than it used to be. But then I noticed that even in years when I made a lot of money, my tax rate was a little lower than I had thought in those years too.
After some digging, I found the reason. Our Social Security Tax (also known as FICA or “Old-Age, Survivors, and Disability Insurance”) is charged in a regressive way. The rate actually goes down as your income goes up! Most people pay 6.2% of their income. High wage earners pay a fixed amount (currently $7,886.40, it has changed slightly from year to year).
The Social Security income cap on how much is taxed has been around since the government started collecting the the tax in 1937. But because of disproportionate wage growth – those at the top spiraling farther and farther away from stagnant middle and lower class wages – the amount covered by the cap has gone down significantly.
That means than someone earning $90,000 per year pays 6.2%. Someone earning $900,000 per year pays less than 1%!
Eliminating the Social Security income cap to change the way it is taxed would guarantee full benefits – the secure retirement of tens of millions of Americans as well as serious disability and survivor’s’ benefits – for another 60 years. And according to a study released by the Center for Economic and Policy Research only 1.6% of the nation’s wealthiest would be affected.
We think that those 1.6% of people who make more money should have a higher tax rate than people who make less money. A few thousand dollars means a lot more for the $90,000 a year family than for the $900,000 per year family. The high income family might see its wealth go up or down a little bit. The middle class family will see their ability to spend money that helps their local businesses and drives the economy go up a little.
For some reason, this is seen by some as a radical idea. Peter DeFazio and Bernie Sanders are the sponsors of the latest bill to address this inequality, but simply put: government policies that favor the wealthy over the middle class are counterproductive for all of us — not only the middle class people saving for retirement, but the business people and investors trying to make money too.