Question: Why have a cap on how much income is taxed for Social Security? The poor minimum wage earner pays a much higher percentage of his/her earnings into Social Security than a millionaire.
Ric: You’re correct that, on a percentage basis, minimum wage earners pay more in Social Security taxes than those with higher incomes do. It’s also true that most taxpayers pay more in Social Security taxes than they pay in income taxes.
People earning less than $128,400 in 2018 pay Social Security taxes on 100 percent of their income, while those earning more pay taxes only on their first $128,400. In other words, those who earn $500,000 pay Social Security taxes on just 25.7 percent of their income. This doesn’t seem fair to you, and you’ve asked why.
The one-word answer: politics.
Wealthy people have greater influence on tax law than others, and members of Congress respond to their concerns. If your response to this is that it’s not fair, well, fairness has never been a requirement for Congress when drafting legislation.
And before you think, well, the system isn’t fair because the burden is on lower-income taxpayers, consider this: In 2017, only 2.9 percent of U.S. households earned more than $250,000, yet they paid 55 percent of all income taxes, according to the Internal Revenue Service. Does that seem fair to you?
Clearly, fairness is in the eye of the beholder. So, you can see why it’s a challenge for Congress, and why lawmakers strive to strike a balance between the amounts of income people pay in taxes and the percentage of income they pay. It’s complicated, isn’t it?
This material was prepared for informational and/or educational purposes only. Neither Financial Engines Advisors L.L.C (also referred to as Edelman Financial Engines) nor its affiliates offer tax or legal advice. Be sure to consult with a qualified tax or legal professional regarding the best options for your particular circumstances.