Tens of millions of Americans rely on Social Security to help them make ends meet in retirement. Each year, key changes to Social Security affect the benefits that participants in the program receive, especially because monthly payments are tied to changes in the cost of living.
Another thing that typically changes annually is how much money the Social Security Administration levies in payroll taxes. There's a maximum dollar amount of wages, salaries, and other earned income that's subject to the Social Security payroll tax of 6.2%, and employers are also required to pay an equal 6.2% amount out of their own pockets. That maximum amount, known as the Social Security wage base, is also subject to inflationary adjustments. However, the adjustment is tied not to costs of living but rather to rising wage levels, and so the increases differ in size from what recipients see in their annual pay increases.
Data source: Social Security Administration. Chart by author.
The SSA just announced that the 2020 wage base will rise $4,800 to $137,700. That 3.6% boost in the maximum amount of wages subject to payroll tax is more than twice the 1.6% increase that Social Security recipients will see in their 2020 benefit checks. But it also continues a streak that has seen the wage base amount rise by more than 16% in just the last four years. In large part, a strong U.S. economy is responsible for the increase, as rising labor rates are the key factor in pushing the wage base up.
Most Americans won't notice any difference, because the vast majority of workers make less than last year's wage base of $132,900. For those who make $137,700 or more next year, however, the wage base increase will deliver a tax hike of almost $300.
Some want to change the whole concept of the Social Security wage base. Several proposals from presidential candidates would apply payroll taxes to earnings at various levels above the wage base, citing the regressive nature of imposing a tax only up to a certain maximum level of earnings.
High-income earners can argue that the formula for determining benefits delivers no additional payments for earnings above the wage base either. Yet lawmakers repealed the wage base limit on Medicare payroll taxes back in the 1990s, and so it's entirely possible that a measure like those currently proposed could eventually become law.
