I heard a congresswoman make the following comment regarding Social Security: "Lift the cap on social Security, and it will be solvent."
Can you explain what she said?
I thank you for your reply.
Thanks for the question!
Let's start with solvency. When a company is "solvent", that means that the company has enough cash (or other assets that can quickly be turned into cash without hindering company operations) to meet their obligations (e.g.: pay bills, repay debt, buy inventory, etc.). These assets that can be quickly turned into cash are called "liquid assets". In contrast, long-term assets are assets that would take longer than 1 year to turn into cash (land, factories, large machinery; things that require multiple payments). Companies like to be liquid because that means they have enough cash to do whatever they need to do. With they don't have enough liquidity, then they can become insolvent, which means that they can no longer afford to operate properly.
So, when someone talks about social security remaining solvent, they mean that the social security will not run out of money. If social security was to become insolvent, then they would no longer be able to make payments to recipients.
Social security earns revenues through an income tax. It has a special tax dedicated just to funding it. Then that money is used to provide services to qualifying individuals, including monthly payments for income. Recipients are, by a very large margin, retired people age 55+, although not exclusively. The original plan didn't work because our average population is now aging. The baby-boomers are entering retirement age, and with a long recession and high unemployment lowering national income and its associated taxes, there are concerns regarding our ability to continue funding it.
When they say "lift the cap", they could mean 1 of 2 things.
1) Raise the income cap
2) Eliminate the income cap entirely
Right now, people are taxed only on the first $100,100 they make in a year. So, they will pay the same amount in social security tax whether they earn $200,000 in a year, or $200,000,000 in a year. That's the "cap" - a maximum limit on the amount a person will pay in a single year. By increasing this cap, or eliminating it entirely, they will pay the same tax rate, but more of it. That will increase the amount of money that social security makes, so that it can continue to remain solvent.