Although it may appear that millionaires and billionaires shouldn’t receive Social Security benefits, there is no law prohibiting it, and it makes mathematical sense. Social Security is not a welfare program in which money is given to anyone who asks. Social Security is instead funded by payroll taxes paid by workers. As millionaires and billionaires earn more money than the majority of Americans over the course of their careers, they also contribute a greater amount of tax to the program. Even though they may not be “in need” when they retire, they have contributed significantly more to the program than the majority of Americans. Here is a brief overview of how Social Security actually operates, as well as a discussion of how millionaires and billionaires benefit more than other Americans from the program’s structure.
How Does Social Security Receive Funding?
Social Security is funded through payroll taxes paid by employees. Current workers contribute to the system for the benefit of retirees, and when those workers retire, the next generation of taxpayers will pay for their retirement.
When additional funds are required, they are transferred from the Social Security Trust Fund, which is comprised of excess contributions from previous years. One of the problems with Social Security as it is currently structured is that the Social Security Trust Fund is rapidly depleting, and according to current projections, it may be insolvent by 2033. However, retirees will continue to receive payments from taxes paid into the system by active workers.
What Is the Tax Rate on Social Security?
Current employees pay 6.2% in Old-Age, Survivors, and Disability Insurance taxes in addition to 1.45% in Medicare taxes. Workers collectively contribute 7.65 percent of their income to Social Security. Employers pay a 7.65 percent payroll tax on behalf of their employees. As self-employed individuals are both employers and employees, they must pay both sides of the tax, totaling 15.3 percent.
How Do Wealthy Americans Benefit From Social Security Tax Structure?
Despite the fact that all workers with earned income pay 6.2% in OASDI taxes, there is a threshold above which this tax is eliminated. The Social Security wage base for 2022 is $147,000. This means that if you earn more than this amount in 2022, you will not be subject to this tax. This can be a significant advantage for millionaires and billionaires, as they are taxed on a small portion of their income. In contrast, the majority of Americans pay OASDI and Medicare taxes on their entire income.
What Are the Average and Maximum Benefits of Social Security?
The average Social Security retirement benefit for 2022 is $1,657 per month. The maximum possible benefit, however, is $4,194. To be eligible for this benefit, you must file for Social Security at age 70 and have earned at least the Social Security wage base for 35 years. In other words, the majority of Americans do not approach the Social Security maximum benefit.
This maximum payout assists in leveling the playing field between millionaires and billionaires. While high-income earners are exempt from Social Security taxes on earnings above the wage base, their maximum payout is also capped. The Social Security retirement formula does not take earnings above the wage base into account. In 2022, whether you earn $147,000 or $147 million, your Social Security taxes and credit toward your future retirement benefit will be identical.
When a millionaire or billionaire might not qualify for Social Security benefits.
You are not automatically eligible for Social Security benefits if you reach retirement age. Technically, 40 “quarters of coverage” are required to qualify for Social Security benefits, which for the majority of workers equates to at least 10 years of paying Social Security taxes. However, Social Security taxes are only imposed on earned income. Investment income, such as dividends from stocks and bond interest, is not considered “earned income” by the IRS. As many millionaires and billionaires inherited their wealth and live off investment income, they are ineligible for Social Security retirement benefits unless they work and pay Social Security taxes.