Social Security taxes up to $147,000 wages. That could change
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Taxing the rich is a big issue in Washington these days.
President Joe Biden recently proposed a so-called billionaire minimum income tax in his 2023 annual budget, which would increase taxes on the nation’s wealthiest households.
Under the plan, individuals with net worth of $100 million or more would be taxed at 20% on their full income, including unrealized appreciation.
But another proposal floating around Capitol Hill — raising taxes on high earners making $400,000 and above a year — was not mentioned in Biden’s budget and could help solve Social Security’s funding problems.
Social Security is funded by payroll taxes, which apply to wages up to $147,000 in 2022. Up to this income limit, which is adjusted annually, both the employer and the employee contribute 6.2% of the salary.
A recent proposal proposed by Congress would apply this payroll tax to wages of $400,000 and above to prop up the program.
The clock is ticking for lawmakers to make changes to ensure the program can continue to deliver on the promised benefits. The Social Security Board of Trustees estimates that funds could run out by 2034, when 78% of benefits are due.
To shore up the system, leaders face a choice of cutting benefits through changes such as raising the retirement age, raising taxes, or a combination of both.
Collecting Social Security payroll taxes on those above the wage base is a popular idea with the public and even has its own campaign slogan, “Scrap the Cap,” said Nancy Altman, president of Social Security Works.
How a wage base increase might work
Once an employee exceeds the threshold for paying Social Security taxes on the first $147,000 of their annual income, their paychecks are no longer subject to these taxes.
As a result, workers above the earnings limit may only pay payroll taxes for Social Security for part of the year.
“A lot of people don’t even know there’s a maximum, and when they find out, they think the law should be changed so that everyone pays year-round,” Altman said.
A Medicare tax of 1.45% also applies to wages. Along with Social Security, this represents a 7.65% tax paid by both employees and employers and is known as FICA, which stands for Federal Insurance Contributions Act.
Notably, there is no wage cap for the Medicare tax after Congress abolished it starting in 1994.
Today, lawmakers could decide to make the same change to Social Security. You could also choose to increase the tax rate from 6.2%.
What changes might be included
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Democrats have proposed raising the Social Security tax again on wages of $400,000 or more. Income up to $147,000 would still be taxed. Then there would be a donut hole or loophole where taxes would not be collected until wages reached $400,000 and the tax was again assessed.
According to Kathleen Romig, director of Social Security and Disability Policy at the Center on Budget and Policy Priorities, there are other ways lawmakers could include more wages in the Social Security payroll tax.
That could mean the tax is simply levied on all wages over $147,000.
In addition, they could introduce a tax surcharge specifically for higher earners and potentially reduce the benefits they receive.
Just keeping up with the growing wage inequality in this country… would close a significant part of the funding gap.
Director of Social Security and Disability Policy at the Center for Budget and Policy Priorities
Lawmakers could also choose to apply Social Security taxes to programs that didn’t exist when Congress last considered the issue, such as transit subsidies or flexible spending accounts.
Since the cap was first set, wages at the top have risen dramatically faster.
Social security payroll taxes originally covered about 90% of wages. To cover that wage level, the cap would need to be around $270,000, according to a 2016 estimate.
“Just keeping up with the growing wage inequality in this country, let alone the other forms of inequality, would close a significant part of the funding gap,” Romig said.
Changes become more expensive over time
The longer Congress waits to act, the less likely it becomes that raising the taxable wage base alone will be enough to solve Social Security’s broader funding problems.
Eliminating the cap once was enough to eliminate the deficit, according to Joe Elsasser, founder and president of Covisum, a Social Security claims software company.
Even if all wages are now taxed, that only covers 60 to 70 percent of the shortfall, he said.
“Each year that we delay reforms increases the cost of tax revenue for current workers to meet needs indefinitely,” Elsasser said.
Raising the taxes workers have to pay raises questions about intergenerational equity, he said.
“Is it fair to get the next generation to support their parents, which is what actually happens when you raise payroll taxes to fund benefits for current retirees?” Elsässer said.
If the wage tax rate is raised above 6.2%, it means less net wages for workers.
“From the point of view of individual planning, the challenge is not to crowd out one’s own old-age provision,” said Elsasser.
https://www.cnbc.com/2022/04/30/social-security-taxes-up-to-147000-in-wages-that-could-change.html Social Security taxes up to $147,000 wages. That could change