The Social Security Administration recently announced that the new maximum base for wages subject to social security taxes will increase from $90,000 to $94,200 effective in 2006. This amounts to a tax increase of $520.80 on affected wage earners and their employers. (Half of this tax is imposed on each. Self-employed persons will bear nearly all of it, as they get an income tax deduction for the employer’s portion which thus reduces some of the impact.) The SSA estimates that this will affect about 11.3 of the 161 million workers subject to these taxes.
We have previously expressed concerns in this blog about the prospects for further increases in this base as a means of addressing the shortfall of social security revenues in relation to promised benefits. However, these adjustments based on average wage growth continue to occur regardless of any reforms.
When you consider that a person earning $90,000 in wages in 2005 will pay $5580 in social security taxes, with a like amount imposed on the employer (thus depressing the wage increases available to this worker), the total impact in 2005 is $11,160. (It will be $11,730 next year). On top of this, medicare taxes of 2.9% will add another $2610. (There is no wage cap on the medicare portion.)
The social security tax is likely to be more significant than the income taxes paid by this worker. Consider, for example, a family of four with a single wage earner making $90,000. (Or, if you like, two workers with $45,000 of income each.) When you take into account employee contributions to a tax-favored retirement plan (let’s say $9,000), total itemized deductions of $20,000 (charitable contributions, mortgage interest, property taxes, etc.), and four personal exemptions (at $3200 each), the taxable income of this family is around $48,200. The federal income tax is $6500. But wait – this family may have two child credits of $1000 each, making the federal income tax amount due only $4500 -- almost 1/3 of the total social security taxes imposed.
The comparative magnitude of the social security tax system increases as the worker moves down the income tax scale. However, the lower-earning worker gets a proportionally larger benefit from the social security portion of those taxes. In effect, those workers get forced savings which ultimately benefits them in the amount of social security benefits received. As discussed in previous blogs, the higher-earners don’t get this same bang for the social security buck.
All of this goes to show that social security reforms are still important public issues, even though they seem to be on the back burner these days in the wake of natural disasters and other political doings. I remain concerned that the possibility for real reforms may be stifled by the day-to-day political bickering which is ultimately creates noise, but no long-term benefits for the American people whom these folks are supposed to be representing.