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Wednesday, October 12, 2011

Reality Check - How Many People Have Income Above the Social Security Wage Cap + S. 1558 proposal

There is an earnings cap on Social Security taxes, but not on Medicare taxes. For 2011, this cap is $106,800. Once an employee's wages or self-employed person's business income exceeds this amount, no more Social Security tax is owed for the year. In 2011, the employee's share of Social Security is 4.2% while the employer pays 6.2% (the employee's rate is scheduled to go back to 6.2% in 2012). The Medicare tax (1.45% each for employer and employee and 2.9% for self-employed) applies to all wages and self-employment income.

Much talk about the tax law and changes always sounds like the changes affect everyone directly. That is unfortunate because if we were talking about the tax issues facing the majority of U.S. taxpayers, we'd be talking about complexity of basic filing such as filing status, dependents, Earned Income Tax Credit and various education provisions. Instead, more talk is spent on the top corporate tax rate, the estate tax, repatriation, capital gains, energy credits, international tax provisions, and more. These later items involve a lot of dollars, but not always lots of taxpayers (at least not directly).

I mention this because of a report from the Center for Economic and Policy Research issued last month - "Who's Above the Social Security Payroll Tax Cap?" The issue paper explores who would be affected if the cap were removed and if it were instead raised to $250,000. It also reminds us that the vast majority of individual taxpayers (here, more specifically, workers) are not 6-digit (or greater) earners.

Their findings for 2009:

5.8% of workers had wages above $106,800 (so, 94.2% had wages below $106,800)

1.2% of workers had wages above $250,000 (so, 98.8% had wages below $250,000)

It is well depicted in a pie chart on page 3 of the report. They also break down the figures by various demographics.

The authors note that Senator Sanders (I-VT) is expected to introduce legislation that would keep the $106,800 cap (which is adjusted annually for inflation) but then remove it for wages above $250,000 (so no Social Security on wages between $106,800 and $250,000). I see that Senator Sanders has introduced S. 1558 which does just that. He calls this bill - `Keeping Our Social Security Promises Act'.

Some considerations:
  • What are the dollar amounts? What are the earnings for employees and self-employeds with earned income above $250,000?
  • Will the additional Social Security contributions lead to any increase in Social Security benefits for these individuals? If not, should there be a higher income tax rate with part of that money put into Social Security?
  • What other changes should be made to Social Security to improve it? I have heard some talk over many years about modifying the CPI approach for annually adjusting benefits. What has happened to that idea?
  • How does the S. 1558 proposal compare to the effect of the Medicare tax on unearned income of higher income individuals that goes into effect in 2013?
  • How doe the S. 1558 proposal tie to any discussion of keeping the 2011 tax rate cuts (originally the 2001/2003 tax cuts)?
What do you think?

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