Okay, time for a quiz. Let’s say you’re employed — what then is the maximum amount you will pay in Social Security taxes (FICA) this year?

The answer is 4.2 percent of the first $110,100 gross pay you earn or a maximum amount of $4,600.

Okay, so what then is the Social Security tax if you make OVER $110,100?

Ready for this? Zero percent. Nada. Zippo.

The fact is, whether you make an annual salary of $110,100 or $500,00 or $5 million, you pay the same Social Security tax — $4,600 and change.

For wealthier Americans, that is like a built-in small bonus in your take-home pay once you pay out $4,600. After that, the FICA man stops coming around. For millionaires like A-Rod or Katie Couric, the FICA man probably stops comin’ round the first week of the year.

I would lay money (maybe even $4,600) that a lot of Americans have no idea that Americans of more means get a free ride on that nasty little FICA line in your paycheck once they hit that cap. Shhh….

But is that fair? Is it a regressive tax? And wouldn’t we be able to solve the entire Social Security “crisis” — the not so far away date when the fund will run out of money — if only we eliminated that cap and kept taxing Americans of greater means?

If we raised or eliminated the cap, it’s possible that the tax overall would even go down, not to mention that we’d no longer have to worry that the fund would run out of money.

If this seems to make a lot of sense (it does to me) why is no one talking about it? Well most likely because it means raising taxes or closing a loophole which, to many politicians, is the same thing.

It’s just another example of why simple solutions seem so exotic in this silly political season. Better to engage in magical thinking, the kind that says you can have all your services and not raise taxes at all. And let’s face it, more than likely, whoever the next president is, will appoint yet another commission to come up with a very complicated solution that will probably go nowhere.

 

 

  1. First, Social Security taxes are 12.4% of wages, not 4.2%. The employer matches a matching contribution. Given that employers will reduce what they pay people for these costs, virtually all economists – including the SSA – assume that the employee carries the full cost.

    Second, Social Security isn’t welfare. It is a system which pays benefits based on contribution. It isn’t that Katie pays less than you, she contributes more and gets more back. The problem is that she get back a lot less per dollar contributed. According to the SSA, she may get back as little as 1/10th what a low-wage worker gets. That is pre-tax. So Social Security is already highly progressive, ignoring what people get for contributing is a half-truth.

    If Social Security didn’t give you back anything, you might look at it as a tax-break. If you see it like that you should vote to end the system. Social Security isn’t welfare. It doesn’t have visibility into need so distributing welfare through that program would be expensive and unproductive.

    The problem here is that you see it as a tax not as what it is.

  2. Paul LaRosa says:

    Social security taxes may be 12% of wages but that’s NOT what individuals pay in the example I gave. It’s true freelancers pay full freight but not those who are employed by a company — they pay 4.2% max. Furthermore, I don’t understand how — in your example — wealthier Americans pay more in and get less back. From what I understand, pretty much everyone gets back what they pay in in a few years. The half-truths appear to be on your end. I don’t understand how any low-income workers would object to having those making over $110,000 pay more. I could understand how businesses would object but I stand by what I said — I see SS taxes as regressive and don’t understand your arguments. And BTW, I would agree to pay more. Let’s at least raise the ceiling over a few years to make it more equitable.

  3. Social Security is a risk management product. It is insurance. It cannot be compared to a savings vehicle. These are different beasts. You can’t look at insurance like “pretty much everyone gets back what they pay in in a few years.” It is like saying pretty much everyone who has an auto accident gets back more than they paid in premiums. Insurance is measured by present value of past contributions vs present value of expected benefits. These can be viewed from SSA’s moneys-worths studies.

  4. “Social security taxes may be 12% of wages but that’s NOT what individuals pay in the example I gave.”

    When you say that the individual pays 4.2%, that is withholding. The individual also absorbs the other 6.2% in the form of lower wages. This is an economic concept that is accepted by virtually all economists from left to right wing, including the Social Security Administration.

    This is incremental tax on US productivity. Businesses will care to the extent that the offshore alternatives put US goods competitively at a disadvantage. You see this only affecting the rich. The problem is that the ‘rich’ tend to make money managing people of modest means. So if this affects 0.01% of the market place, it affects the entire business. It isn’t like they will offshore only the high-wage worker.

  5. I do not understand your definition of equity. According to the SSA, high-wage workers can get as little as 1/10th back per dollar contributed. That is pre-tax. The tax code penalizes high-wage workers who have SS benefits. It gives low-wage workers a credit to offset the high cost of payroll taxes.

    How can you describe 1/10th as less than equitible?

    Social Security isn’t welfare. It is a system that takes in contributions and pays benefits based on contribution. Basically how can you justify a system that isn’t welfare giving one 10 times as much as another.

  6. Paul LaRosa says:

    We have a fundamental difference of opinion and we’ll have to leave it at that. No matter your argument, I believe Americans who earn more should not get a break because of that….maybe (shudder) I do believe in socialism, not that there’s anything wrong with that. And 4.2 percent is the government social security tax on wages….you could look it up.

  7. We don’t have a difference of opinion. We have a difference of subjects. You think Social Security is a tax, and argue that it should be applied equally. It is insurance, and the Social Security Administration is telling you that it is heavily bias to low-wage workers.

    You aren’t a socialist. A socialist doesn’t like Social Security because it gives more high-wage workers. Benefits are based on contribution a concept that no socialist likes.

    You do not have a difference of opinion with me. You have a difference of opinion with the Social Security Administration. 4.2% of wages is withheld. You are ignoring the employer share and the general tax payer subsidy. Social Security collects 12.4% of wages. The Social Security Administration for economic purposes says that payroll taxes in their entirety derive from the employee. So you don’t disagree with me. You disagree with the rest of the world, of which I am only one person.

  8. paul says:

    I’m tired of this type of obfuscation over what I see as a simple and clear cut solution to a vexing problem but there will always be people who say ‘can’t do that.’ I say you can….and we should….

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