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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
Steven Blackburn
February 09, 2013 at 7:29 pm

I think that it is an obvious thing that the cap needs to be removed. To make something that I sincerely believes holds our society together last indefinitely is essential to our future prosperity. I also believe that the criticism regarding individuals having to pay 12.4 percent is also legitimate. My policy recommendation: follow through on the second option, and provide an exemption for individuals who would have to pay the 12.4 percent. Not just the rich who would have to do so, but anyone who would have to pay 12.4. My question regarding such a scenario is: What would be the effect of doing so mean for the system? Would that work to solve the currently projected insolvency? If not, then I believe that it would make sense to follow up on some austerity options, such as reduced caps in pay-outs/indexed benefits. Separately, though, I don't think that we should put all potential solutions into a single basket of reform choices and label them "potential fixes for social security." We should take each and every one of them and analyze them separately. I see no reason to keep a cap on taxes. It is a tax for a social insurance program that is central to the American way of life, and has been standard practice in developed countries since the Great Depression. Nothing should threaten that, especially taxation policies that coddle the wealthy. But other questions of fairness, such as was mentioned above regarding successful business owners, should also be taken into account. And, other measures, such as indexing of benefits (pay-out caps) should be included in policy development for managing the system. It's never either/or, and we shouldn't pretend that it is. The real mission is to preserve social security for our own future, and for future generations.

DORIS
February 09, 2013 at 5:39 pm

Let everyone pay all year. No cap on earnings!

bob
February 09, 2013 at 12:51 pm

Don't you are asking too much out of the rich to keep paying into social security, or not take it? they need the extra money to have asafe built into their casket so they can take with them, not to mention the cost of an armored truck, to take the rest of their riches to the cemetery Come on people?

george fooks
February 09, 2013 at 12:35 pm

any extra amount that you put into social security will not solve the problem until you keep politicans from spending the money for anything but social security.

Tim A.
February 08, 2013 at 7:51 pm

Quite frankly, there are 2 ways social security could be saved from now until eternity.
1. Lift the cap and have the rates be tiered. The normal rate up to say $500K or $1M. After that the rate decreases until you are paying maybe 1/4% on $20M+.
2. Those people that don't need social security shouldn't be collecting it. Do you honestly think wealthy people need to be collecting social security. Please don't give the argument that they have paid into it all these years. It's like paying your property taxes. A major portion of your tax bill goes to paying for public education...whether you have kids in the school system or not. That portion of your taxes is not eliminated from your bill when you no longer have kids in school or you don't have kids at all. It shouldn't be an automatic payment when you reach a certain age.

R. Graber
February 08, 2013 at 7:41 pm

Any concept where people should pay more but receive less in order to shore up a shortfall created by politicians who spent the money on things other than what it was taken for is nuts and just plain wrong. It is making some people pay a bigger share of the politicians lagress in spending money to get votes from people who will benefit by others paying more than their share and getting less back. Social Security is insurance (although bad insurance). If Warren Buffet buys life insurance with his family as beneficiaries, should the insurance company not have to pay because they inherit a lot of other money. Of course not, same with paying for socical secuity.

Carolyn
February 08, 2013 at 3:35 pm

Remove the cap. SS saved!!

Eritzman
February 08, 2013 at 3:33 pm

I love that in the midst of the recession everyone describes themselves as a 'job creator' - I don't think they are creating any jobs. I think they may be employing people but creating more jobs is another thing entirely. So, Dave - I say if you add 100 or more jobs to the economy at 450% of the poverty line for 10 or more years then, you get Social Security Special - benefits up to the full amount of your earnings.
In the meantime, why not let us know what % of your projected monthly retirement income will be social security. That may put your pov in perspective.

Frank
February 08, 2013 at 3:05 pm

Yes Joe the economist we are in the overall position we are in because the spending goes on & on. Always any savings derived anywhere is quickly directed to another place for spending, never saved to pay off the debt. That's why today at 0% interest we are paying almost 40 cents on every dollar to pay for the debt. The majority inn the last election must understand that consideration of our rapidly increasing debt is unsustainable. All it would take is a calimity in the world, disruption in our oil supply even another 911. The whole US economy would fall prey to hyperinflation the likes that has never been seen before in the world. The interest charged would be unsupportable.

john keller
February 08, 2013 at 2:44 pm

Eliminate the cap but for self employed anything over the existing cap indexed for ingflation they only pay what wage earners pay not twice the pecentage.There should be some increase in benefits if you pay on more of your money but there could be an absolute cap on benefits indexed for inflation. This would solve social security funding problems forever.