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Is the Social Security Wage Base Going to Rise?

By Matthew Frankel, CFP® - Apr 10, 2016 at 9:43AM

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Increasing the amount of earnings subject to Social Security taxes could help save the program.

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If you read the news, chances are you've heard about Social Security's cash flow problems. In a nutshell, more money is being paid out to beneficiaries than is being collected in taxes, and this gap is expected to widen in the coming years as baby boomers retire. In fact, the program's trust funds are projected to run out of money entirely in 2034.

The good news is that the system can be fixed, and most potential solutions take one of two formsL benefit cuts or tax increases. And, one of the most discussed ways to increase Social Security taxes is to raise or even eliminate the wage base.

The Social Security wage base: past and present
Each year, there is a maximum amount of earnings that are subject to the Social Security payroll tax, and this is also the maximum amount used in the computation of benefits. The amount is adjusted annually to keep up with changes in the national wage average index.

For 2016, the base is $118,500, and is unchanged from 2015 due to a lack of wage growth and inflation. Here's a chart to give you an idea of how the wage base has grown over time:

Year

Wage Base

Year

Wage Base

Year

Wage Base

2002

$84,900

2007

$97,500

2012

$110,100

2003

$87,000

2008

$102,000

2013

$113,700

2004

$87,900

2009

$106,800

2014

$117,000

2005

$90,000

2010

$106,800

2015

$118,500

2006

$94,200

2011

$106,800

2016

$118,500

Data source: Social Security Administration. 

What raising or eliminating the wage base could do
Since Social Security favors lower-income workers, increasing the wage base would have the net effect of more money flowing into Social Security relative to the benefits being paid out. In other words, higher-income workers would pay more Social Security taxes, and this would only result in a moderate increase in their retirement benefits.

There have been several different numbers thrown around for a possible earnings cap increase, and $250,000 seems to be a popular amount. When Congress last adjusted the wage cap, it did so with the intention to impose the payroll tax on 90% of all earnings. However, the earnings of the highest-paid workers have increased faster than those of the average worker, and this is no longer the case. Now, only about 83% of earnings are covered by Social Security taxes.

According to a study by the National Academy of Social Insurance (NASI), increasing the earnings cap to the point where 90% of earnings are taxed would eliminate 29% of the projected funding gap. This would increase the earnings cap to about $230,000. Eliminating the earnings cap entirely would solve nearly three-quarters (74%) of Social Security's solvency issue, and that's without any other changes.

It's a popular solution
Increasing or eliminating the wage base wouldn't only increase Social Security's tax revenue and help keep the system solvent, but it would also mean bigger Social Security benefits for higher-income workers. As a result, it's a rather popular solution among all age groups, income levels, and political parties.

Increasing the earning cap to include 90% of all earnings as discussed is favored by 84% of Americans. Even more significantly because of its potential to nearly eliminate the funding gap by itself, eliminating the earnings cap entirely is favored by 80% of people. And, some groups you might not think would support such a proposal are in favor of eliminating the cap. In fact, 76% of high-income families (earnings $100,000 or more) support it, as do 79% of Republicans -- whom many perceive as favoring benefit cuts instead.

The bottom line is that whatever Social Security reforms are proposed will have to make their way through congress, which would make it difficult for less-popular solutions like benefit cuts to gain any serious traction. The widespread support of eliminating the wage cap combined with its potential to help return Social Security to a healthy financial state make it a likely part of any Social Security reform package.

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