social-security

Fact of the Day: The Social Security Wage Cap For 2013 Is $113,700

Fact of the Day, Government, Social Safety Net 14 495

What is the Social Security “wage cap”? It’s the maximum income level taxed at the 6.2% rate for Social Security benefits. All income above the cap ($113,700 in 2013) is free and clear of Social Security (payroll) taxes. Yes, you read that correctly. All income above the wage cap is exempt from Social Security tax. It’s safe to say this is quite a regressive tax.

The Social Security Administration officially refers to the wage cap as the “contribution and benefit base.”

Social Security’s Old-Age, Survivors, and Disability Insurance (OASDI) program limits the amount of earnings subject to taxation for a given year. The same annual limit also applies when those earnings are used in a benefit computation. This limit changes each year with changes in the national average wage index. We call this annual limit the contribution and benefit base. For earnings in 2013, this base is $113,700.

The OASDI tax rate for wages paid in 2013 is set by statute at 6.2 percent for employees and employers, each. Thus, an individual with wages equal to or larger than $113,700 would contribute $7,049.40 to the OASDI program in 2013, and his or her employer would contribute the same amount. – SSA – Contribution And Benefit Base

Social Security benefits you receive during retirement are based on the amount contributed over your working years. In this sense, Social Security is not seen as a welfare program, but rather a social safety net where benefits received are proportional to taxes paid. The wage cap translates to a cap on benefits. It is for this reason that there is resistance to eliminating the cap. But if we consider for a moment (to keep Social Security solvent), we remove this cap and subject all income to Social Security tax, some would argue that Social Security turns into a welfare program where the wealthy subsidize the benefits of the poor and the middle class. However, this is not a reason to take the option off the table. There’s a write-up on this very subject on The Washington Post titled (“Research Desk responds: Could raising the income cap save Social Security?“). Three scenarios are considered:

Janemarie Mulvey and Debra Whitman of the Congressional Research Service looked at this question in 2008 by evaluating three different proposals. The first would raise the cap so that 90 percent of wages are taxed (CRS estimates this would mean a cap of $171,600 in 2006) and pay higher benefits to those affected; the second would eliminate the cap and pay higher benefits; and the third would eliminate the cap for taxes but would not increase benefits. Here is how the proposals would affect the actuarial state of Social Security, as compared to its current trajectory:

actuarial impact of social security cap proposals - The Washington Post

As you can see, eliminating the wage cap while keeping the benefits cap produces a Social Security surplus. PBS NewsHour also looked into this topic:

Question: How much revenue would come into the Social Security Trust Fund each year and how far out would Social Security solvency be extended if the payroll cap were to be eliminated?

Paul Solman: I’ve just gone back to a story we did on this very subject back in 2005 with Columbia finance professor Stephen Zeldes, “Raising Tax Cap Explored as Way to Close Social Security Gap,” and here’s what I reported at the time:

“Removing the cap entirely, thereby imposing a flat tax of 12.4 percent on all earnings — essentially a $100 billion a year tax increase on the wealthy — would more than completely close the funding gap.”

- What Impact Would Eliminating the Payroll Cap Have on Social Security? – PBS Newshour

I’m not proposing any specific solution, but this is information to keep in mind next time someone tells you Social Security is in dire straits and needs to be privatized. You can tell them it’s hogwash.

 


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David K. Sutton

Chief Writer and Editor of The Left Call - I'm a full-time IT engineer, part-time political blogger. I founded The Left Call in 2011 because I believe in social justice, economic equality, and the idea of forming a more perfect union. In addition to written content, I also host the LEFT CALL RADIO Podcast.

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  • ThomPaine

    This is beyond silly. You think a person making $120k is rich? They strive to beat that limit so they get to keep more of what they make. Your proposal means they pay another $473 in taxes and so does their employer. How is that helping demand, how is that keeping money in the working persons’ wallet, how is that helping the economy? You lefties are so dumb, you think humans don’t find ways around things. Small business owners can simply cap their earnings and take the rest as a dividend. So you’ll need more rules and more police to enforce them. When you think you finally have a stranglehold on those of us who work, guess what, we’ll stop working too. And you know where that leaves us all? In a “workers’ paradise”. Enjoy.

    • http://leftcall.com/ David K. Sutton

      I didn’t say making $120k makes someone rich, but go ahead and ask your question of someone making minimum wage and you might get a different response.

      Some of us believe in personal responsibility more than the conservatives who claim to. So I’ll gladly pay more taxes to support the public good, and I’m not going to whine about it and blame everyone else for why I (you) decided to stupidly quite a job all because taxes were a little higher (like as if there’s an alternative).

      Try again.

  • Batman

    I make about $160K and am not rich by any means but would support Option 3, no cap with same benefits. Not great for me but it keeps the system solvent and is somewhat fair in that upper level income earners are paying a little more. If you think that a breakdown of the SS system is not going to adversely impact high wage earners and our whole economy, think again. What I object to is increasing eligible age any more than 67. Try holding on to or a job or getting a new one in this country at age 65 to 67!?!?

    • http://leftcall.com/ David K. Sutton

      With the current economic situation and tens of millions of Americans living paycheck to paycheck, I do think this is the most sensible approach. Void the extreme economic inequality, however, I might suggest raising the payroll tax a slight bit (for everyone) along with an increase to the cap, as a second best alternative.

  • Greg

    “Social Security benefits you receive during retirement are based on the amount contributed over your working years. In this sense, Social Security is not seen as a welfare program, but rather a social safety net where benefits received are proportional to taxes paid. The wage cap translates to a cap on benefits. It is for this reason that there is resistance to eliminating the cap. But if we consider for a moment (to keep Social Security solvent), we remove this cap and subject all income to Social Security tax, some would argue that Social Security turns into a welfare program where the wealthy subsidize the benefits of the poor and the middle class.”

    Yes, that would be correct. It would turn what was suppose to be a safety net contribution system into yet another tax the rich program. How about you allow people to get out of this ponzi scheme. that is a much better option as that is all Social Security ever was was a ponzi scheme

    • http://leftcall.com/ David K. Sutton

      Of course that’s just one suggestion. Nothing needs to be done anytime soon as Social Security is financially sound for decades. Oh, and no, it is not a Ponzi scheme regardless of how many times some people want to call it that. It’s been around longer than most have been alive. A Ponzi scheme would collapse under it’s own weight long before it reach the age of Social Security.

      • Greg

        Really? So is there an account all the social security money you have been depositing goes into? No. Why? Because the working today are funding the social security of those retired today. The problem is the ratio of how many working vs how many retired is out of whack which is why it is insolvent. And yes, by the definition of a ponzi scheme, social security absolutely is a ponzi scheme. You really should look up how insolvent Social security is based on unfunded liabilties. “Social Security is financially sound for decades” is a crock.

        “A Ponzi scheme is a fraudulent investment operation that pays returns to its investors from their own money or the money paid by subsequent investors” This is exactly how social security works.

        • http://leftcall.com/ David K. Sutton

          It’s called a trust fund and it’s invested in securities that guarantee both principle and interest. You know, there are some smart people who do the work every year to determine the insolvency projections of Social Security and Medicare and I’m probably not going out on a limb to say they know more than you or I.

          Social Security is sound for decades, and it only started paying out more than it takes in within the past few years. You know what that means? Might be time for another overhaul to the law, like the one done in 1983. It’s hardly time to pull the plug and call it a Ponzi scheme. Sure, if you think something doesn’t work, and you don’t want it to work then guess what? It’s probably not going to work. But for the rest of the country who wants to continue to see Social Security for another 80 years, we will work to make sure it remains solvent even in the face of efforts by people like you to fulfill false narratives.

          • Greg

            The Social security group only predicts solvency for 20 years (this is significantly less than what they were predicting 10 years ago, so I guess the smart people are not terribly smart now are they). As their own predictions have been horribly wrong over the decades, something will have to be done much sooner.

            http://www.heritage.org/research/reports/2013/06/history-suggests-social-security-insolvency-is-coming-sooner-than-projected

          • http://leftcall.com/ David K. Sutton

            Because solvency projections change as the facts on the ground change. And sorry, I have no desire to click on a link to heritage.org. Every projection is done assuming a certain set of factors remain the same. For example, when government used to regularly raid the trust fund for other purposes, that was outside the purview of what an insolvency report could predict. Another factor is the economy. A weaker economy means less money going to the trust fund. The bottom line is this, the U.S. government cannot go broke. It is the sole producer of it’s currency, the dollar. It has a monopoly on the “manufacture” and distribution of the dollar. That means the U.S. government cannot go bankrupt. It cannot run out of money like you or I can. That’s not to say we just print money to keep social security solvent, that’s simply to say that government, even if it was irresponsible in the past with regard to the SS trust fund, has the unlimited ability to make sure SS never becomes insolvent. That of course is not the optimal solution. The optimal solution is to not raid the fund and to make sure what goes in can pay for what goes out. That may mean we need to adjust the payroll tax up, or increase the cap, etc. And this entire argument is for entertainment only, because SS is not going anywhere. You and I will be gone and SS will still be there.

          • Greg

            Aaah, see now you have touched the key point. Monetary policy. The government cannot go broke while the dollar is the global currency. That is already starting to change. Most countries manufacture their own currency (I would know as I worked on most of it). The key is how does it balance out against the world. When the US dollar gets booted (as the British sterling did before it) then we are in a different arena, Devaluing our currency to pay bills is a recipe for disaster.

            And yes, the better solution is to stop raiding it, get more people to work to contribute into it and adjust the ages, etc. all about how much is going in and how much is going out. Frankly, I would have rather had all my SS wages myself as my investments have done much better over the decades than social security does. Oh well, not going to happen so might as well not complain too much about it. And as far as bringing it to solvency, I’m frankly not terribly convinced this divided nation may fix it this time. It is fixable for now, but will those people in charge do what needs to be done? Maybe as SS is popular across the board and anyone trying to close it down (even though you can do much better than treasuries, especially these days) will get spanked. Who knows, but I would expect it to hit a breaking point well before 2033 as the SS actuaries are predicting.

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