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Uncapping Social Security taxes

By Jennie L. Phipps · Bankrate.com
Thursday, February 7, 2013
Posted: 5 pm ET

A couple of days ago, I wrote about economists at the University of Pennsylvania Wharton School of Business who suggested giving workers  the chance to receive their delayed retirement credit as a lump-sum payment. They theorized that this would, on average, delay people's retirement for a year and a half to two years, giving workers money at a time in their lives when they need it most and saving Social Security some cash.

That blog has received more than 200 comments, and most of them are critical of the Wharton idea. A frequently mentioned alternative suggestion is to shore up Social Security by eliminating the $113,700 cap on Social Security wages so that high earners pay more tax.

Reader Dennis Zimmerman expressed that widely held opinion succinctly: "I have said for years that the earnings cap for paying Social Security tax should be eliminated. If you are earning that much money, you can afford to continue paying the tax on all your earnings."

But before you hop on Zimmerman's bandwagon, there are other things to consider. The American Academy of Actuaries points out that there are at least two ways to go about this, and they yield distinctly different results.

  • You could gradually raise the annual earnings cap to cover 90 percent of all wages, and use the higher cap for calculating benefits -- so higher earners also get more Social Security. That would fix 30 percent of Social Security's fiscal problems.
  • If you eliminate the cap altogether and ask high earners to pay Social Security tax on all earnings but calculate benefits only on earnings up to the current cap -- so high earners don't get a higher benefit -- that would fix 100 percent of Social Security's fiscal problems.

Before you opt for the second option, remember that the increase would be a potentially huge tax with no personal return for some very hardworking people. As reader Dave posted:

Let's just tax the job creators to death. A successful small businessperson will have to pay 40 percent in federal taxes, both sides of the Social Security tax which is 12.4 percent, plus Medicare tax, plus their state, county and city taxes, which in some state is 10 percent to 13 percent. That's over 60 percent!

If you are among those who support the idea of removing the cap on Social Security earnings altogether, what do you think of Dave's complaint? If you were in his shoes, how would you look at this retirement planning dilemma?

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29 Comments
tom sturm
February 21, 2013 at 5:22 pm

Clearly it is completely equitable NOT to tax wages in excess of the cap. Why? Because no benefits accrue on such wages!

Dave
February 19, 2013 at 9:06 pm

To S.A. Hyder-There is another way for a small business person to stop paying higher SS taxes. That is to quit. Lay off their employees & still stay in the U.S.. The wealthy or even just the financially secure (my category) are just poor people who did something different with their time & money over a period of decades. I grew up on the farm (born in 1957). In the early 70’s I made $2.00 per hour when the minimum wage was $2.35. I saved more money than some of my relatives who were working at Farmer Jacks or one of the Big Three (they made $8.75-$11.00 per hour). In 2009 my retired GM employee brother-in-law said “why can’t the rich just pay more”? I know that you don’t want to hear my whole response, but how ironic it was that we were still driving our 1998 Oldsmobile as our main vehicle (cost $26,000.00 brand new) and he had a policy of buying a new car every three years. He had one of the best jobs in the world for 30 years, spent every dollar he made on depreciable items (never bought a house) and gambling, and then he was furious that he couldn’t tax job creators and savers more & take their money, to bail him out. We’re not even in the “rich” category, but we did without, paid off our house, put money aside for retirement, and now he & his friends want my savings & profit on my investments to be taxed more, so he can get my money through a government program. Should I be taxed more, or should he just do without (for being so irresponsible). It’s us savers who are getting the shaft.

Dave
February 19, 2013 at 8:48 pm

To Eritzman-I’m already being taxed to death. I have no desire to create 100 jobs. Why?
How ironic, I just met with my financial advisor today. My discussion was about retirement in four years. Social Security wasn’t even figured in the equation. I’m sure that eventually we’ll have “means” testing which means that because I saved & invested all of my life. I won’t get anything. So to answer your question, the amount I’m figuring is 0%.
To Tim A—It never ceases to amaze me how many people think that “others” should pay for them.

JohhnyX
February 17, 2013 at 2:07 pm

I agree with eliminating the cap, but I also feel the cap should stay in place or only be raised slightly for employeers. The rate can also (over a 10 year period) be slowly raised on employees, and either capped or more slowly increased for employers.

Rosalie
February 09, 2013 at 10:26 pm

I agree wholeheartedly. Eliminate the cap !! Those who earn more should be paying more....they won't feel it. Think about it....The majority of earners never reach the cap !

Barbara Williams
February 09, 2013 at 10:24 pm

Unlock the cap and limit the payout. Those who earn more than $113K are hard working but so is every body else. The big difference is that those earning over the cap have a whole lot more expendible income to save in other investments to support them in later years. I earned over the cap for the last ten years of my employment (and worked 60 hour weeks) but it annoyed me no end that I stopped supporting social security after reaching the cap. People need to stop thinking that SS is their personal savings program; it is a safety net only for which they accrue credits for eligibility; it needs to be thought of like unemployment benefits; where those making high income in no way receive weekly benefits that compare to their previous salary.

S.A.Hyder.Ph.D.
February 09, 2013 at 9:07 pm

Remove the cap from the earnings of the individual but cap the employer contribution and the benefit.
"The successful small business man" who does not want to pay taxes can go and live in Saudi Arabia. He will not have to pay any taxes there. But he will have to forgo his US citizenship else he may still have to pay US taxes when he files his US returns. There is no easy way out of taxes.

Jim
February 09, 2013 at 8:35 pm

Even the current Social Security doesn't figure benefits in line with the salaries people have paid in on. I had a salary many times my spouse's salary (who worked for low pay), and I paid at the Self Employment Rate, usually on the maximum. I paid in for more years, also. My Social Security benefits are only $1600 a month, and hers are $1300 a month. We both took them recently at age 62. If based on what we paid in, I should have far more than that compared to her. So, for the high earners today, they do not need to have their increased contributions (if the cap is raised or eliminated) create pro-rata benefit increases. That doesn't even happen now! Give some increase in benefits, but on a declining scale of some kind.

Danna
February 09, 2013 at 8:10 pm

Unlock the cap! I have always believed it was unfair for some to stop paying into SS when the rest of us who make less pay more as a percentage of our income.