You may have heard that Social Security benefit cuts could come down the pike in a little over a decade if the program's financial woes aren't addressed. The problem is that Social Security gets the bulk of its revenue from payroll taxes, and that in the coming years, that revenue stream is expected to shrink as baby boomers leave the workforce in droves.
Meanwhile, workers don't automatically pay Social Security taxes on all of their income. Instead, each year, a wage cap is established that determines how much earnings are subject to those taxes.
This year, the wage cap is $147,000, so earnings beyond that threshold aren't taxed for Social Security purposes. But next year's Social Security wage cap is rising quite a bit, and that means higher earners should expect to part with a lot more of their income.
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A much higher tax burden
The Social Security Administration recently announced a series of changes to the program that are set to take place in 2023, and a big one is a wage cap of $160,200. Meanwhile, the Social Security tax rate on earnings is 12.4%. Salaried workers get to split that tax with their employers, while those who are self-employed must cover their Social Security tax bill in full.
Now that 2023's wage cap is rising to $160,200, workers whose income reaches or exceeds that limit will be on the hook for $19,864.80 in Social Security taxes. By contrast, this year's maximum Social Security tax burden was $18,228.
Of course, if you're a salaried worker, you won't be forced to fork over that $19,864.80 in full. Rather, you'll lose $9,932.40 of your income to Social Security.
But still, compared to 2022, if you're splitting your Social Security tax bill with your employer, you'll be losing an extra $818.40 in 2023. And if you're self-employed, your total Social Security tax increase will amount to twice that much, or $1,636.80.
A major jump
It's easy to say that higher earners are in a strong enough position to withstand an increase to their Social Security tax burden. But it's also worth noting that 2023's wage cap increase is the largest one we've seen in years.
In 2022, the wage cap went from $142,800 to $147,000, representing an increase of $4,200. In 2021, the wage cap went from $137,700 to $142,800, representing an increase of $5,100.
Next year's wage cap of $160,200 represents a whopping $13,200 increase. That's more than double the increase we saw in 2021 and 2022.
Of course, the good thing about a higher wage cap is that it serves the very important purpose of pumping more money into Social Security. But that may be of little consolation to those who are about to see their Social Security tax burden increase sharply.
Let's also remember that workers earning $160,200 a year pay the same amount in Social Security tax as those earning $1 million. President Biden is trying to change that by implementing higher Social Security taxes on wages above $400,000. But some lawmakers are apt to push back on that, even though it could mean shoring up Social Security's finances and preventing benefit cuts down the line.
