Social Security taxes up to $147,000 in wages. That could change
[ad_1]
Istock | Istock | Getty Images
Washington’s current hot topic is taxing the wealthy.
In his annual budget for 2023, President Joe Biden has proposed a “Billionaire Minimum Income Tax” which would allow the government to increase taxes on America’s richest households.
The plan would see people who have a net worth greater than $100 million subject to a 20% income tax, which includes unrealized appreciation.
But one other proposal kicking around Capitol Hill — to raise taxes on high earners making $400,000 and up a year — went unmentioned in Biden’s budget, and it could help solve Social Security’s funding woes.
Payroll taxes are used to fund social security. They apply in 2022 to all wages above $147,000. Employer and employee each contribute 6.2% to wages above the income threshold. This amount is then adjusted every year.
A new proposal by Congress seeks, among other things, to increase the payroll tax for wages over $400,000, as well as to make some changes to strengthen the program.
It is urgent that lawmakers make necessary changes in order to keep the program running as it was promised. Social Security Board of Trustees predicts that the fund could run dry in 2034 at which time 78% of benefits would be available.
The system needs to be strengthened and leaders have to make choices about cutting benefits or raising taxes.
Nancy Altman of Social Security Works said that the idea to apply Social Security payroll taxes for those earning more than the base wage is popular with the public.
What could be done to increase the wage base
Workers who earn more than $147,000 annually are exempt from Social Security tax.
Workers who earn more than the threshold can pay Social Security payroll tax for a portion of the year.
Altman stated that “a lot of people don’t know there is an upper limit and they believe the law needs to be amended so everyone pays in every year.”
Wages are also subject to a Medicare tax at 1.45%. Combining this with Social Security it amounts to a 7.65% tax that is paid by employers as well as employees. This tax is called FICA which stands for Federal Insurance Contributions Act.
After Congress abolished it in 1993, the Medicare Tax has no wage limit.
Members of Congress could make similar changes to Social Security today. A higher tax rate, which could increase from 6.2% to 7.2%, is also possible.
Changes that could be made
Getty Images| EyeEm | Getty Images
Democrats proposed that the Social Security payroll taxes be reapplied starting at $400,000 per wage. Taxes would be applied to earnings up to $147,000 The tax would not be applied until the wages reach $400,000 before it was assessed once again.
Kathleen Romig (director of Social Security policy at Center on Budget and Policy Priorities), says there are many other avenues lawmakers can use to include higher wages in Social Security’s payroll tax.
It could also be applied to wages over $147,000.
They could also create a surtax for high-earners, which would reduce the benefits that they receive.
A significant portion of the funding gap could be closed by simply keeping pace with growing wages inequality.
Kathleen Romig
Director of Social Security and Disability Policy at the Center on Budget and Policy Priorities
It is possible for lawmakers to also apply Social Security payroll tax to programs that weren’t available when Congress last dealt with this issue.
Wages at the top have risen dramatically in the time since the initial cap was established.
Initially, social security payroll taxes only covered around 90% of wages. Romig explained that today’s wage cap should be $275,000.
Romig stated that “just keeping up with growing wage inequalities in this country, and other forms of inequality would close a significant portion of the funding gap.”
Time will make changes more costly
Congress will be less likely to raise the taxable wages base alone to address the funding problems of Social Security if it waits too long to take action.
Joe Elsasser (founder and president of Covisum), a software company that claims Social Security benefits, said the elimination of the cap sufficed once to erase the deficit.
He said that even though all wages were taxed it would only cover 60%- 70% of the shortfall.
Elsasser stated that “each year we delay reforms the cost of having tax revenue on existing workers meet the needs indefinitely goes down.”
He said that raising taxes for workers raises concerns about intergenerational equity.
Is it fair that the next generation supports their parents? This is what happens when payroll taxes are increased to pay benefits to current retirees. Elsasser said.
A higher payroll tax rate than 6.2% will result in lower take-home wages for workers.
Elsasser explained that “from an individual planning standpoint, the challenge it is not to allow it to crowd out your retirement savings.”
[ad_2]