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Should Social Security Get Rid of Its Earnings Cap?

Millions of retirees rely on Social Security for their income. But Social Security is in danger of not being able to pay full benefits in the future. Forward-looking policymakers are considering options now to prevent a future catastrophe for Social Security recipients, but the choices involved are difficult.

One such solution involves getting rid of the earnings cap on Social Security. In the following video, Dan Caplinger, the Motley Fool's director of investment planning, looks at the issue, beginning with the state of the current law. Right now, wages up to $113,700 each year are subject to payroll taxes for Social Security, with employees paying 6.2% of their salary and employers paying another 6.2% on their workers' behalf. But Dan observes that with Medicare, all earnings are subject to payroll taxes. Doing the same with Social Security seems to some like a reasonable way to bring more money into the program.

But as Dan notes, eliminating the earnings cap raises another question: what to do with Social Security benefits for high-income earners. Right now, benefits are based on all earnings up to the $113,700 limit. If the cap disappears but benefits are allowed to increase further, it costs Social Security more and only solves about 30% of the problem, according to figures from the American Academy of Actuaries. Yet if benefits aren't raised, many argue the earnings-cap elimination is unfair and imposes the equivalent of a new 12-percentage-point tax hike on high-income earners, according to figures from the American Enterprise Institute. Dan concludes that there are no easy answers to the Social Security debate but that the sooner we find a solution, the easier it will be to implement.

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Dan Caplinger
TMFGalagan

Dan Caplinger has been a contract writer for the Motley Fool since 2006. As the Fool's Director of Investment Planning, Dan oversees much of the personal-finance and investment-planning content published daily on Fool.com. With a background as an estate-planning attorney and independent financial consultant, Dan's articles are based on more than 20 years of experience from all angles of the financial world.

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