Social Security needs money to stay afloat and keep paying benefits. And it gets the bulk of its revenue from payroll taxes.
The reality is that people like to grumble about paying taxes, and that's understandable. But by paying into Social Security, workers today are helping to ensure that the program will be around once their retirement kicks off.
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Workers don't necessarily pay Social Security taxes on all of their income. Rather, there's a wage cap that's put in place each year, and earnings beyond that threshold are not subject to Social Security taxes.
This year, the wage cap sits at $160,200, so income beyond that point isn't taxed for Social Security purposes. And yes, that means that someone earning $160,200 a year and someone earning $1 million have the same exact Social Security tax burden. It may seem unfair, but that's the system, at least for now.
Next year, however, the wage cap is rising. And higher earners may not be so happy with that change.
Higher earners should prepare to pay up
On Oct. 12, the Social Security Administration announced a number of key changes to the program that include an updated wage cap for 2024. And the wage cap is $168,600.
Meanwhile, the Social Security tax rate is 12.4% of earnings up to the wage cap. Salaried employees split that 12.4% evenly with their employers, but those who are self-employed must cover the entire 12.4% themselves.
In light of this change, workers with income equal to or beyond the new wage cap will have to pay a total of $20,906.40 in Social Security tax in 2024. That's an increase of $1,041.60.
Again, salaried workers will only pay half of that increase. But self-employed workers will pay it in full.
An imperfect system
Some lawmakers are pushing to raise the wage cap for Social Security tax purposes or even eliminate it entirely. The logic is that higher earners should not be exempt from paying more into the program when they're the ones who can afford to do so most easily.
But it's important to remember that Social Security has a maximum monthly benefit it will pay to retirees that's tied to the wage cap. If it were to be lifted, the program would have to raise its maximum benefit to keep things equitable. All told, a higher wage cap may not do all that much for Social Security's finances.
Taxes are a part of life, and that extends to the taxes used to keep Social Security running. Higher earners may be frustrated by the idea of losing more of their income to Social Security taxes. But handing over those taxes is a good way to help ensure that benefits will remain payable to seniors in the near term, as well as the long term.
Many workers today worry that Social Security won't be around for them once they're ready to retire. Continuing to fund the program is an easy way to alleviate that concern.
