Uncapping Social Security taxes

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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?