The Social Security Administration (SSA) announced that the maximum amount of wages in 2017 subject to the 6.2% Social Security tax will rise from $118,500 to $127,200, an increase of more than 7%.
The maximum amount of Social Security tax a worker can pay will increase from $7,347 in 2016 to $7,886.40 in 2017, an increase of $539.40.
There is no wage/tax limit on the 1.45% Medicare tax.
At $127,200 nearly 95% of Americans will have all their wages subject to the tax. This is significant because politicians who want to raise the cap further or eliminate it are really saying they expect 5% of American workers to bail out the system which was supposed to be self-sustaining through contributions by all American workers and their employers.
Eliminating the cap can be done in two ways:
Require workers to pay taxes on all earnings and calculate their ultimate Social Security benefit on those earnings or
tax all earnings, but use limited earnings (the $127,200 for example) for the benefit calculation.
Doing the later violates the very premise on which Social Security was built and turns the program into a form of federal welfare.
Eliminating the taxable wage cap does not make Social Security sustainable and does not provide excess funds to add additional benefits.
You may wonder how eliminating the taxable wage cap, but calculating benefits on all wages can actually improve Social Security funding. It’s because of the benefit formula. Lower earnings receive a higher benefit. For example:
PIA formula (Primary Insurance Amount) note the word “insurance”
For an individual who first becomes eligible for old-age insurance benefits or disability insurance benefits in 2017, or who dies in 2017 before becoming eligible for benefits, his/her PIA will be the sum of:
(a) 90 percent of the first $885 of his/her average indexed monthly earnings, plus
(b) 32 percent of his/her average indexed monthly earnings over $885 and through $5,336, plus
(c) 15 percent of his/her average indexed monthly earnings over $5,336.
As you can see, earnings over about $60,000 per year receive only a 15% credit toward the Social Security benefit.
Categories: Social Security