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.
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 (AAPL 0.11%) 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 (WMT -0.61%), 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 (F 2.33%) and General Electric (GE 0.01%) 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.