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Why You Pay 235 Times More in Social Security Taxes

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Social Security has become one of the most important sources of retirement income for millions of Americans. But along the way, Social Security has had to collect ever-increasing taxes to cover the benefits it pays out, and if you work, the odds are that those higher taxes are coming out of your pocket.

From modest roots to massive proportions
When Social Security first started back in 1937, the taxes the program collected were extremely modest. From each worker's paycheck, the government withheld 1% of wages to pay Social Security payroll taxes, and the employer was also responsible for paying an additional 1%.

In addition, the Social Security tax was established with built-in limits on how much income was subject the tax. Back then, the tax applied only to a maximum of $3,000 of income, meaning the most that any single worker would have taken out of their annual earnings was $30.

Fast-forward to today, however, and things have changed quite a bit:

As you can see, two things have happened to increase your potential Social Security tax liability. First, the tax rates have risen sharply, so that now, the government withholds 6.2% of your earnings for Social Security taxes. Moreover, the amount of wages subject to the higher tax has itself increased substantially, so that now, as much as $113,700 in earnings gets taxed for Social Security withholding purposes.

The net effect of those higher amounts is to increase the maximum potential tax you'll pay to $7,049.40 -- nearly 235 times what workers paid from 1937 to 1949.

What happened?
One of the biggest issues facing Social Security right now is demographics. According to the most recent data available, there were about 2.9 workers paying Social Security taxes for every person collecting benefits. That compares with a ratio of 159.4 workers for every recipient back in 1940. With roughly 55 times fewer workers funding each retirees' benefits, the program clearly needed more revenue from each worker in order to keep pace.

Corporations also pay a big part of the burden. With the typical Apple (NASDAQ: AAPL  ) employee making about $60,000 according to Fortune's 2012 CEO pay study, the company would pay roughly $3,720 per employee for its share of Social Security taxes, amounting to a total of as much as $270 million based on its employee count of 72,800 according to Yahoo! Finance. For Wal-Mart (NYSE: WMT  ) , lower average salaries of $22,100 lead to a per-worker Social Security tax liability of just $1,370, but its 2.2 million employees make that a potential $3 billion liability. Industrial giants Ford (NYSE: F  ) and General Electric (NYSE: GE  ) have potential Social Security tax liabilities of $685 million and $1.42 billion, respectively. Not all of those workers are located in the U.S., so actual liability amounts are lower, but the companies nevertheless pay a substantial share of Social Security taxes for their workers.

The bad news for Social Security is that the trend toward more recipients and fewer workers will only get worse as the population continues to age. By 2034, as the entire baby boom generation reaches retirement, the Social Security Administration projects that there will be only two taxpaying workers for every Social Security recipient.

Will taxes go up further?
What's unclear is how Social Security will change to meet new demographic challenges. Some lawmakers have proposed raising taxes or wage limits further, while others have suggested benefit reductions. Regardless, even just the natural progression of inflation adjustments to the wage base will keep Social Security taxes moving higher in the future -- even as those paying the tax have no assurance that they won't see their benefits cut before they ever receive them.

Apple pays a big share of Social Security taxes, but investors are more concerned about whether Apple's shares will keep plunging. The Motley Fool's senior technology analyst and managing bureau chief, Eric Bleeker, is prepared to fill you in on both reasons to buy and reasons to sell Apple and what opportunities are left for the company (and your portfolio) going forward. To get instant access to his latest thinking on Apple, simply click here now.

Read/Post Comments (11) | Recommend This Article (3)

Comments from our Foolish Readers

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  • Report this Comment On April 20, 2013, at 10:49 AM, abshelby wrote:

    Perhaps the author of this article should take a few moments to inflation correct his numbers to give a realistic comparison.

  • Report this Comment On April 20, 2013, at 11:48 AM, Varchild2008 wrote:

    Inflation doesn't play any part in this abshelby.

    The tax rate is by percentage with a maximum dollar cap.

    People don't get paid the same wages today as they did in 1937. The minimum wage, for instance, has gone up substantially since its inception.

    I really don't see any value in factoring in inflation...That proves what exactly?

    The tax is by PERCENTAGE...

    doesn't matter what inflation was then and now.

    1% of 500 is a far cry from 6.2% of 500.

    College expenses have gone up at a rate faster than inflation. Factor that in before factoring in inflation.

  • Report this Comment On April 20, 2013, at 11:51 AM, Varchild2008 wrote:

    The problem I have always with inflation adjusting attempt to prove some point....

    is that it doesn't consider WAGES (at all).

    Sure $500 = $5000 or whatever....


    But how does that matter if it took just as long to get $500 as it would today to get $5000 working?

    How does inflation adjusting matter if cost of living expenses have gone up based on a rate that is not tied to Inflation?

    We have something called the "Chained CPI" which attempts to tie the rate of increase in Social Security Cost of Living increases to inflation.

    Guess what? Until "Chained CPI" ever happens....Social Security Cost of Living expenses HAVE NEVER BEEN tied to inflation.

    So loosely throwing around inflation numbers isn't going to provide any realistic picture of things.

  • Report this Comment On April 20, 2013, at 12:37 PM, abshelby wrote:

    My comment about inflation correction concerned the use of the 235 factor to compare SS taxes paid in 1937 to today. If one uses the Bureau of Labor Statistics, the inflation correction is about a factor of. 16.2. This means that the max SS tax of $30 paid by those earning $3000 in 1937 has an inflation correction value of $480. This means that the increase in max SS taxes is $7049/$480, which is a factor of 14.6, NOT 235. Your point would have been sufficiently strong even if the correct numbers had been used. However, it is nice to see one actually use correct numbers. Inflation corrections are important.

  • Report this Comment On April 20, 2013, at 12:52 PM, TMFGemHunter wrote:

    It's true that we pay more in Social Security taxes today. But we also get more in Social Security benefits. Average life expectancy didn't even hit 65 until sometime in the 1940s, which essentially means that many people were paying into the system who were likely to die before receiving a dime in benefits.

    Today's "issue" could relatively easily be corrected by raising the retirement age in line with the increase in life expectancy.

  • Report this Comment On April 20, 2013, at 1:26 PM, menefer wrote:

    Author also counts the medicare portion that came along in 1983 and added an entirely new benefit. If you compare what you get for your money, we have a better deal now than in 1930. This article is total garbage that entirely forgets inflation, medicare and the improvements made to the payout.

  • Report this Comment On April 20, 2013, at 2:11 PM, yooperintx wrote:

    The author also neglects to mention that the original SS law increased the percentage by 1/2 percent every three years until it reached 3% in 1949.

  • Report this Comment On April 20, 2013, at 8:56 PM, TMFGalagan wrote:

    @abshelby - There's enough controversy about various methods of inflation-adjusting that I decided to let the nominal numbers speak for themselves.

    @menefer - No, I didn't include Medicare. That's a separate 1.45% tax on top of the 6.2%.

    @yooperintx - I'm not sure about the 1/2-percent increase you're referring to, as the Social Security Administration's own figures make no mention of it:

    @TMFGemHunter - Excellent point, which I addressed a little while ago:


    dan (TMF Galagan)

  • Report this Comment On April 20, 2013, at 9:36 PM, yooperintx wrote:

    The 1935 law that implemented SS, Sec 801:

    "SECTION 801. In addition to other taxes, there shall be levied, collected, and paid upon the income of every individual a tax equal to the following percentages of the wages (as defined in section 811) received by him after December 31, 1936, with respect to employment (as defined in section 811) after such date:

    (1) With respect to employment during the calendar years 1937, 1938, and 1939, the rate shall be 1 per centum.

    (2) With respect to employment during the calendar years 1940, 1941, and 1942, the rate shall 1 1/2 per centum.

    (3) With respect to employment during the calendar years 1943, 1944, and 1945, the rate shall be 2 per centum.

    (4) With respect to employment during the calendar years 1946, 1947, and 1948, the rate shall be 2 1/2 per centum.

    (5) With respect to employment after December 31, 1948, the rate shall be 3 per centum."

    There is a link on the SS web site under History of Social Security. Don't know why they don't show that in the link you provided.

  • Report this Comment On April 20, 2013, at 10:11 PM, yooperintx wrote:

    Checked a bit further and it appears that between 1939 and 1949 Congress amended the SS tax rate eight times, freezing the rate at the 1937 rate of 1%.

  • Report this Comment On April 21, 2013, at 7:33 AM, reginadowning wrote:

    I want to point out there are no simple solutions. Raising the retirement age, will mean that more aged workers will apply for, and get, disability. Disability costs for taxpayers are higher than paying retirement benefits. Since the recession, disability applications have (something like) tripled. Meanwhile the SSA disability courts are overwhelmed and it takes most people more than a year to get a decision.

    Raising the limit also presents economic issues. So if people who make $113,700 or more are taxed on all their income, there are arguments that money would be better spent if it were used to boost the economy.

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