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Should Social Security Raise the Payroll Tax Rate?

Social Security helps millions of retirees make ends meet. But the program is in long-term financial jeopardy. In order to prevent a future financial crisis for Social Security, some believe that raising the payroll tax rate for Social Security taxes is the best way to keep the program fully funded.

In the following video, Dan Caplinger, The Motley Fool's director of investment planning, examines the arguments for and against raising the Social Security payroll tax. On one hand, Dan notes that a relatively small increase would go a long way toward fixing Social Security's financial problems. A gradual rise from its current level of 6.2% to 7.2% over the next 20-25 years would eliminate half of the expected shortfall, according to government estimates, while a jump to 7.6% would eliminate it entirely.

However, Dan also observes that any increase would also hurt employers, which have to bear their own burden for Social Security taxes. In addition, some argue that the regressive nature of the tax makes it inappropriate to raise rates, as those who earn above the wage cap for Social Security tax pay no extra amount at all beyond the cap. Dan concludes that with no easy answers, a balanced approach considering multiple solutions is most likely to be the final solution.

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Read/Post Comments (20) | Recommend This Article (3)

Comments from our Foolish Readers

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  • Report this Comment On October 19, 2013, at 10:09 AM, tbyrd58 wrote:

    Why not raise the rate to 6.5% and eliminate the cap entirely. That would make the tax way less regressive.

  • Report this Comment On October 19, 2013, at 5:59 PM, CamperDann wrote:

    Raising the payroll tax would be disasterous to economy. The economy is in too fragile a state for any tax hike. Businesses need a break. Especially in the wake of Obamacare. 1) Raise the minimum age to receive benefits to 70 y/o. People are living longer than when SS was first implemented. Then, at 65 or even 62 y/o you weren't expected to make it to 70. Secondly, most folks were still working physically demanding jobs. The body breaks down after 30,35,40 years of physical demands. Now a days, the stress is more mental than physical as people spend their day behind a desk. 2) Means test. Someone making over $250,000 doesn't need SS as a retirement income. 3) SS stops taxing after $114,000. It seems to me if someone making $50,000 yearly is taxed 100% on their salary, someone making over $114,00 should too. Unless the benefit is prorated to stop at $114,000. Then you don't need the added tax or supply the added benefit.

  • Report this Comment On October 19, 2013, at 6:29 PM, yooperintx wrote:

    1) I would have no problem with raising the full benefit age to 70. 2) It is already means tested to an extent with the taxing of up to 85% of benefits for those above a certain level of income. That tax is put back into the SS trust fund. 3) The benefit amount is figured on earnings up to the maximum amount taxed for each of your highest 35 years taxed income, adjusted to account for inflation. Your benefit as a percentage of your working income is higher for the lower part of your income and the percentage is reduced as your income increases.

    You can find that information on the SS web site.

  • Report this Comment On October 19, 2013, at 6:57 PM, obey1735 wrote:

    YES!!! Please raise our tax burden even higher! This A.C.A. doesnt QUITE raise my tax burden high enough. I really hope that the Dems can figure out how to raise my S.S. tax as well. I feel as if I am not giving the government QUITE enough of my hard earned money. I would like them to take a little more out of my weekly paycheck. high paying jobs are EASY to come by these days, and I think that we should be working at LEAST half of the work week to pay of the government. They manage money so well, and they can certainly manage my money better than I can. I can only hope that the Dems decide to raise a few more of my taxes as well.

  • Report this Comment On October 19, 2013, at 6:59 PM, BigStruggle wrote:

    Raising the cap is a horrible idea. Those that have invested in themselves and earn more than the cap do not receive enough from the program as it is. Forcing both the employee and employer to pay more than 12% of income into a system that over the course of their careers is absurd, given the payments that are made. Privatize it - force people to save - but stop handing out some people's hard earned incomes (and their employers) to those not paying into the system. Currently, the system is set to be the biggest wealth distribution scam this country has EVER seen (from young to old). The old voted politicians into the system that spend their social security saving - don't put that burden on today's youth (or tomorrows).

  • Report this Comment On October 19, 2013, at 8:09 PM, loveskarma wrote:

    Remove the cap. The cap favors the rich. If you earn a paycheck then you should contribute to SS. It is the fair thing to do. One more thing. I think Congress should be forced to find a way to return the money they "Borrowed" from SS years ago. They receive a 3% raise whether they earn it or not. They should also pay into SS.

  • Report this Comment On October 19, 2013, at 8:58 PM, MESSIER11FAN wrote:

    Everyone should pay into SS, Congress included. Large corporations who outsource to foreign countries should have to pay a small percentage. Not only are they taking away jobs from Americans, they don't contribute to SS or MC.

  • Report this Comment On October 19, 2013, at 9:16 PM, solar6529 wrote:

    Remove the cap which will make it solvent forever and probably allow for a lower payroll tax. Use it strictly for Social Security purposes and prohibit dipping into the fund for anything else. Prohibit suspending the payroll tax for any reason. This fix is very simple and fair. Get to work Congress, this will increase your favorability ratings immensely and will make you look like heroes for saving Social Security for our kids and grand kids.

  • Report this Comment On October 19, 2013, at 9:31 PM, solar6529 wrote:

    Raising the payroll tax rate would hurt the poor and the middle class which in turn would severely hurt the economy, since those 2 groups would have less spending money to stimulate growth. The best thing to do is remove the cap which could possibly allow for a lower payroll tax for everyone, providing more spending money to stimulate the economy. Prohibit any more suspensions in the payroll tax, prohibit using it for anything other than Social Security purposes and it will be solvent forever.

  • Report this Comment On October 19, 2013, at 10:37 PM, penneyless2 wrote:

    the best thing for social security would be to take it out of the hands of the government, they are stealing the working peoples money, put in the hands of a private trusted investment firm the way large companys do their retirement and it would build more interest.

  • Report this Comment On October 19, 2013, at 11:28 PM, Phily101 wrote:

    Raising payroll rates or raising the caps or any other measure that brings in more money will only assure one thing - as soon as the windfall is available, you'll find politicians scoring points to buy votes by increasing the payouts which will bring it back to insolvency.

    One solution is to try the approach that even the French think is fair - increase the # years of contributions. If a person is employed from age 20 to 67, that's 47 potential years of contributions. Make it the best 40 years of payments to account for time off or layoffs.

  • Report this Comment On October 19, 2013, at 11:56 PM, bamissfa wrote:

    this was obama's 2008 campaign promise that he would remove the SS cap on income and that was all that was needed to save SS/

    Never heard another word from the liar after he was elected.

    He also promised to NOT raise taxes on the middle class but that's exactly what he did with his "affordable care act aka obamacare". THAT will hurt the economy.

    He also promised to remove income tax from our elderly. Never heard another thing about that either.

    Guess he's just been too busy working for NON US citizens and the muslims of the world. WAKE UP.

  • Report this Comment On October 19, 2013, at 11:57 PM, yooperintx wrote:

    I really find it difficult to believe that so many people know so little about SS. Members of Congress have been in SS since the 1980s as part of the Federal Employees Retirement System. Congress has not had a raise since Jan 09 and may not get one this year. SS taxes received most years are more than what is necessary to pay benefits so the excess is invested in special interest bearing treasury bonds. Has been that way since 1935 and is mandated by the law creating SS. SS collects billions each year in interest on those bonds. In at least three years SS tax receipts were not sufficient to pay benefits those years so sufficient bonds were redeemed to make up the difference. The idea of keeping the money in a "lock box" is foolish. It needs to be invested in absolutely the safest investments possible, namely US treasury bonds. Just what "trusted private investment firm" would you have manage that money? Based on past actions I don't think any of them can be trusted with the SS Trust Fund and the fees they charge would be much more than what the current management costs.

  • Report this Comment On October 20, 2013, at 1:14 AM, Jaxon2013 wrote:

    Before these crooks rise SS tax, why not return the money they "borrowed" first and see how fat the account gets and this way they would have a real account of what is needed and than they could stop using it as their own little slush fund.

  • Report this Comment On October 20, 2013, at 1:50 AM, chainfools wrote:

    cut defense spending and by doing that you'll cut the crap!!!!

  • Report this Comment On October 20, 2013, at 8:23 AM, DerAlteJunger wrote:

    My reaction to an article that describes how Social Security benefits are paid:

    “Will You Get Your Social Security Check if the U.S. Defaults?”

    By Mark Miller | Reuters – Tue, Oct 8, 2013 12:53 PM EDT

    “Those funds can't be used for anything other than benefits.”

    BUT those funds ARE put to other use:

    “Every dollar of Social Security payroll tax revenue received by the U.S. Treasury Department is used to fund general operations.”

    AND --- some IOUs are issued:

    “Treasury then turns around and issues special interest-bearing Treasury notes to the SSTF matching the amount of payroll taxes it has received (and spent).”

    THEN:

    These IOUs in the “Social Security Trust Fund (SSTF)” are redeemed by “ issuing new general-issue Treasury bonds”. 

    That simply replaces one kind of “special” debt instrument with another “general” debt instrument.

    In other words, Social Security benefits are ultimately funded by increasing the national debt. 

    ““Social Security . . . a 'pay as you go' program . . .” 

    “Pay as you go” ---- funding benefits by increasing national debt? 

    I don't think so ---”Nothing could be further from the truth.”

  • Report this Comment On October 20, 2013, at 9:01 AM, angelsgiggle wrote:

    Yes, SS AND Medicare should have been raised years ago so these funds remain solvent. You cannot...repeat....cannot pay out more than you pay in and the people who DRAW this money should PAY this money. NOT their employers. Period.

    If you use it, if you plan to draw on your account....you pay. What the hell has that got to do with an employer?

    Eliminate caps....caps are for the rich.....poor people, working people, don't worry about "CAPS" because they are for the rich who will draw the maximum and pay on the minimum. Crazy accounting there.

    Eliminate the employer part....take 11% or whatever from everyone.....everyone....and get on with it.

    There would be overwhelming support for this from the business community so it will get past the crazy tparty and tpartyrepublicans.

  • Report this Comment On October 20, 2013, at 9:41 AM, mitrajo wrote:

    Social Security is supposed to be just for honest folks that have contributed into the system. Stop giving it away to the folks that never put in to the system then we will have no problem with social security. If we stop giving free stuff to the illegals and lazy people only then we will prosper.

  • Report this Comment On October 20, 2013, at 3:48 PM, 2smartforlibs wrote:

    The first sentence in this farce is wrong. It doesn't help it has become the sloe retirement of millions. Many have just done exactly what the left wanted back in the 30's. Become totally dependent on what ever scraps the elite feel the need to give you. Only took from Woodrow Wilson to The overlord Obama to get to the point you have no choice and have to let government take care of you and you can't vote them out for fear you will lose you hand outs

  • Report this Comment On June 29, 2014, at 8:36 AM, bmills77 wrote:

    Social Security is a supplement, nothing more.

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Dan Caplinger
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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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