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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
alvin
February 08, 2013 at 2:43 pm

why not make everyone pay into ss, even the gov't workers and politicians. there is a big base out there.

Frank
February 08, 2013 at 2:41 pm

Come on people! Raising taxes on the rich or the so-called rich will not fill the void. Spending, mismanagement and misappropriation of funds have been the norm for too long both here in the EU and all the other countries who feel prey to this in the past. A continuation will only result in the failures experienced in the past all over the world.

If all the rich were taxed at 100% of their earnings we probably fund this country's debt for about 8 days. Spending is the main culpret, it must be avoided if we are to avoid a default in these programs as well as our country.

bottom of the hill
February 08, 2013 at 1:39 pm

Stop the double dipping. We've contributed to this program over our entire working life (taxed) and are still taxed as we begin receiving benefits; why? "You send me a hundred and I send you (the Government) 20 back; what's the point? Eliminate witholdings after "full retirement age". Keep more income in the pockets of retired workers and let it eventually flow back into the economy and help all big and small businesses alike. It would also provide the FED with a possibiltiy to "stagger" COLA increases to a bi-annual basis; saving the FED big bucks in the off year. Just a thought

bob
February 08, 2013 at 12:40 pm

Everyone who works should pay in till they reach age no matter how much they make, Period..................................

joebagofdonuts
February 08, 2013 at 12:35 pm

My family pays considerable income and FICA taxes. As an employer I pay an additional 7% FICA tax on the salary of each employee up to the cap. There is no cap on the taxes anyone pays for medicare/medicaid. Can anyone tell me what additional benefit a 1%er gets from any governmental entity that justifies a higher tax on that person? The simple answer is that no additional benefits exist that are not paid for by real estate taxes on properties owned. So why should the rich pay more--the answer everyone gives is because they can afford to pay more. Wow--if we extend that logic then a rich person should pay more for a loaf of bread or a gallon of milk than anyone else simply because they can. That really does not sound fair. Maybe we should stop demonizing the hardworking folks that put their noses to the grindstone to earn more than the other person. Question authority do not succumb to it!!

Ms CC
February 08, 2013 at 11:58 am

Oh, on your direct question, in all things be fair. There's no incentive for the rich to agree. Remove the cap and increase the earnings proportionately. But really, we must look at eligibility. There are loopholes there.

Ms CC
February 08, 2013 at 11:48 am

Until I get an answer to this question: Is it a fact that SS funds have been used over the years for other purposes such as war funding, international relief etc? If, so why cant those funds be returned to make the program solvent? Please, please a straightforward answer. Thanks.

Sue
February 08, 2013 at 11:35 am

Why not a middle ground? Raise the gap on income earned up to $500,000 and Calculate benefits on earnings up to $250,000?

Todd Cole
February 08, 2013 at 7:52 am

The answer to most economic problems in the USA is STOP SENDING OUR TAX DOLLARS OUT OF THE COUNTRY.The media will never report this.Take care of home first.

joe the economist
February 07, 2013 at 8:32 pm

You are only fixing Social Security by breaking everything else. As you raise taxes on the rich to pay for Social Security, it is tax revenue that can't be raised for debt reduction, medicare, disability (which is headed for insolvency in 2016), infrastructure, and the rest. If we are going to raise taxes, lets use the money to pay off the debt.