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Social Security: Cap or no cap?

By Jennie L. Phipps · Bankrate.com
Thursday, April 18, 2013
Posted: 3 pm ET

The most frequently suggested solution to Social Security's potential shortfall is to raise the cap on earnings. That would mean people who earn more than the current cap of $113,700 and their employers would owe payroll taxes on earnings above that level.

In some suggested scenarios, those who pay more wouldn't get more. Currently, Social Security's retirement benefits are calculated so that lower-earning workers get back 90 percent of the first $767 of their average indexed monthly earnings over 35 years. Those who earned more over that time get an additional 32 percent of the next $3,857. Higher earners also get 15 cents on the dollar for every additional $1 they earn over $4,624 up to the current earnings cap.

Eliminating the cap and raising what Social Security pays high earners wouldn't solve any Social Security shortfall. More money would come in, but more would go out.

If we raise the cap but we don't pay high earners more, then Social Security begins to look more like a retirement planning welfare program. Andrew Biggs, a resident scholar at the American Enterprise Institute and former principal deputy commissioner of the Social Security Administration, pointed out in The New York Times Wednesday that if we eliminate the cap and don't pay more, "a person earning $225,000 would pay roughly four times more in taxes than he'll receive in benefits."

Biggs adds that the top federal tax rate on earned income is currently 45 percent -- nearly half of what a high-earner makes. He calculates that eliminating the cap on Social Security would effectively raise the top tax rate by about 12 percentage points. That's a whopping tax increase with no commensurate increase in benefits.

I wrote recently about the administration's proposal to change how cost-of-living increases are calculated -- a way to partially shore up Social Security by spreading the burden to include most recipients. Reader reaction was negative, but that proposal still seems far more fair that putting the burden solely on people who earn the most.

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13 Comments
Lydia Bell
September 18, 2013 at 11:28 pm

David H.
Your reasoning is typical of the "successful" who like to emphasize "how hard" they worked. However, they neglect to point out that in addition to education and "hard work", they needed to have and actually had a lot of luck in achieving their version of the "dream". Your career path doesn't only suggest that you went to college on taxpayer's money (GI Bill) but that on several occasions (promotion and a company willing to give you a chance at Vice President of Marketing, all of which has to do with LUCK, for many have the ability and know-how and willingness to "work hard" but are never given the chance.
By the way, your lack of spelling correctly - persue? Bottem? - indicates to me that you had more luck in your career than competence.

Cindy
June 12, 2013 at 3:08 pm

I like this idea - they will draw more money and they should pay more because they can afford to!

David H.
June 06, 2013 at 8:37 pm

Most of you folks don't have a clue about growing up in poverty and then making something of yourself. I retired at the old age of 50 and have never contributed anything to Social Security for the past 15 years. I live off my investment income at somewhere between $250,000 to $275,000 per year. I get that Income whether I get up in the morning at 8AM or I sleep until noon. However to get to that state I had to get my education through the GI bill after doing 4 years in the USMC and a tour in Vietnam during the TET offensive in February 1968. Stop crying poverty. I had to work from the very bottem srarting off as a field engineer with RCA and eventually becoming their Director of Marketing. Then on to a company in Chicago taking a position as Vice President of Marketing and Sales. Most of the people I see ranting and raving about Social Security and Nedicare are the folks who never persued education, were not willing to work the 60 or 70 hour weeks to get the attention of their employers and never had the gusto to form their own business and make it successful