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:
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.”
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.
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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