The Social Security Administration revealed its list of changes for 2017, and one of the most dramatic differences is the 7.3% increase in the maximum taxable earnings for Social Security. Here are the details of the increase, what it could mean for your tax bill, and what could be coming next.
Social Security maximum taxable earnings in 2017
Although inflation over the past year resulted in only a 0.3% cost-of-living adjustment (COLA) for Social Security beneficiaries, the SSA recently announced that the amount of earnings subject to Social Security taxes is increasing by 7.3%, from $118,500 to $127,200.
This is a significant increase, representing the single largest one-year increase in the Social Security wage base in the program's history. In short, the increase is so large because it reflects two years of wage growth. Federal law prohibits an increase in the taxable maximum if there isn't a COLA, and there wasn't one last year.
For workers who earn $127,200 or more, this increase translates to an additional $539.40 in Social Security tax in 2017. And for workers who earn more than the current $118,500 wage cap but less than the new one, their taxes will increase by 6.2% of their earnings in excess of $118,500.
What it means for Social Security
This will certainly translate into a significant increase in Social Security's payroll tax income. According the latest full-year data available (2014), 5% of the working American population earned more than the new taxable earnings cap of $127,200.
Since there are about 173 million workers, this means that 8.7 million people will be affected by the entirety of this tax increase. Including employer and employee portions of the payroll tax, this translates to more than $8.4 billion in additional Social Security revenue in 2017. And, this doesn't account for portion of the population that earns between the current earnings cap of $118,500 and the new one. In all, the increase in the taxable maximum will affect about 12 million people, according to the SSA.
According to the latest trustees' report, the SSA was expecting a $126,000 maximum taxable earnings threshold for 2017, so the actual increase wasn't much more than expected. It may help Social Security's projected $69 billion annual non-interest deficits over the next few years, but probably not by much.
This may be just a starting point
As I mentioned, the larger-than-average increase in the maximum taxable Social Security income in 2017 is due to wage growth combined with the lack of a cost-of-living adjustment last year. However, it's entirely possible that this could pale in comparison with future Social Security taxable wage limits.
It's no secret that Social Security isn't in the best financial shape. In fact, the most recent projection by the Social Security trustees is that the program's reserves will run out by 2034, unless something is done to either add revenue or cut benefits. Benefit cuts in any form are extremely unpopular, but the majority of Americans say they would support tax increases if it preserved Social Security for future generations. And the most popular way to raise Social Security taxes is to do so on high earners, which 83% of Americans support.
There are several ways this could be done, but two common proposals include increasing the taxable maximum to $250,000, or eliminating the maximum entirely. Not only do 80% of Americans favor gradually eliminating the taxable wage cap altogether, but doing so would eliminate nearly three-fourths of Social Security's long-term financial problems all by itself.
The point is that while the increase in the Social Security taxable maximum may seem like a lot to you, especially if you're one of the millions of Americans affected by it, you may not want to get too used to having just some of your earnings taxed for Social Security.