Social Security

Social Security payroll tax and your earnings

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.

nestegg_evaluating_nest_lg_clrAt $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.

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3 replies »

  1. Requiring SS taxes to be paid on wages above $127,200 will result in companies limiting wages above that level, because they will have to pay the 6.2 % SS tax. They will offer other benefits like stock options that will not add to their costs. Or they will just freeze wages, so the worker loses over time with no real wage increase as inflation robs him of purchasing power. The SS tax needs to be raised on every worker to keep the system funded, you can do this slowly until it reaches 10% for both employee and employer over the next 15 years. Benefits increase as the average wage increases, so there is no need to increase benefits more than the current formula.

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  2. It seems to me that the government is doing more to take take from the american people than to give give….Those who have worked hard for many many years deserve a good Social Security income in their golden years…stop taking and start giving ..freakin’ politicians

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