40th anniversary of the social security tax.

[PaulN872695]

It’s been 40 years since the social security tax was imposed back in 1984. And the AARP has done nothing to repeal that tax. That seems like it should have been a year after year priority with election targeting of which congress persons failed to support the repeal of the tax.

Luckily, the Trump administration has promised to finally repeal it. Though I doubt it will actually happen. It didn't during his 2016 term. 

So ultimately, the AARP needs to show its value by creating a campaign targeting members of congress who do not 100% commit to removing the tax. Did you know the income levels where the tax kicks in are not indexed for inflation?  The government very slyly found a way to erode your benefits. The $34,000 income threshold was set back in 1984, would be about $100,000 in today’s dollars. Meaning you would pay no Social Security tax until your income exceeded $100,000 for a married couple filing jointly.

See this youtube video that explains it quite well:

https://www.youtube.com/watch?v=H_-ehZZoafY&t=59s

The Social Security Trust Fund can easily be funded beyond 2035 by simply raising the FICA cap. No need to raise the FICA tax, just the cap.

[PaulN872695]

It is understandable that if all those who are opposed to raising the income tax threshold on SS benefits to 2024 inflation levels, are also independently wealthy and therefore don't really need SS benefits. Perhaps those that depend on SS benefits, don't participate in these community decisions.. Gradually reducing the benefits of lower middle and poor classes through inflation in instead of raising the cap to fund future benefits, seems like a cruel solution to the funding problem. 

[PaulN872695]

I'm surprised to see that nobody here supports indexing the tax threshold on SS with inflation. The original thresholds seemed reasonable at the time. But to me no longer seem reasonable. 

[Tonster521]

@PaulN872695 This topic has been discussed many times. With a little research, you will learn that SS Benefits are taxable only for folks who have additional income. The initial thresholds were established in 1983 (for tax year 1984) for paying Federal Income Tax (FIT) up to 50% of your SS Benefits. Those FIT are returned to the SS Trust. In 1993, additional thresholds were established for paying FIT up to 85% of your SS Benefits. The amounts of FIT from 51% to 85% are returned to the SS Hospital Trust (aka Medicare Part A). 

The SSA advises that only about 40% of the folks who receive SS Benefits pay FIT on their SS Benefits. This usually happens due to other income in addition to their SS Benefits exceeding the thresholds. Here is a link from the SSA .https://www-origin.ssa.gov/benefits/retirement/planner/taxes.html#:~:text=Income%20Taxes%20and%20You.... 

The FIT on SS Benefits returns approximately $50 Billion to the above SS Trusts annually. As Gail pointed out, if the FIT provisions  of the 1983 and 1993 SS Amendments are repealed by Congress, how and where will the SS Trusts obtain that money? Moreover, there is a history that you may or may not know regarding how the SS Trust was almost depleted in 1983. I am including another link for your review https://www.ssa.gov/history/taxationofbenefits.html#:~:text=The%20changes%20introduced%20by%20the,fo.... 

Lastly, in my opinion, the FIT due on SS Benefits is a form of "means testing" even though the SSA and Congress does not admit to "means testing". In other words, if you have other income (financial means), you need to repay some of your SS Benefits back to the SS Trust and Medicare Hospital Trust. Remember, the SS Program is a social insurance benefit created after the Great Depression to help people out of poverty. It is not a retirement plan such as a defined benefit pension, 401 K, IRA, etc. It is also subject to the whims of Congress wherein SS Benefits may be increased or decreased from time to time. It would be reckless for Congress to propose and pass the repeal of SS Benefit taxation when Congress should be focused on increasing SS revenue to avoid depleting the SS Trust.

[PaulN872695]

What many failed to understand that those upper tax limits are not indexed for inflation. So gradually, more and more people were subject to the means tax, reaching into lower and lower income levels. As mentioned originally, those limits of $25,000 and $34,000 would be in the $90,000 and $100,000 range in todays dollars. A little more reasonable. As far as funding the program, as mentioned in the original post, raise the FICA cap, not the tax, the cap. See the following explanation by former Secretary of Labor Robert Reich.   https://youtu.be/GfZuB7XSFys?si=Gi1okLKGTb8vh1dI  A simple solution that the AARP should be aggressively pursuing. 

[GerardV761134]

There should be no FICA cap on social security.

Only the Social Security tax has a wage base limit. The wage base limit is the maximum wage that's subject to the tax for that year. For earnings in 2024, this base is $168,600.

The Social Security limit is $176,100 for 2025, meaning any income you make over that amount will not be subject to Social Security tax. Given these factors, the maximum amount an employee and employer would have to pay is $10,918.20 each ($21,836.40 for self-employed).

[GailL1]

@GerardV761134 

The SS wage base limit is, of course, not the tax which the OP has pasted about = the OP is talking about the tax on benefits which some people have to pay if their income is over a specific amount.

As to the wage cap - you know why it is there in the 1st place, right?  Because it also limits the benefits - thus the wage based limit is the maximum on which benefits are figured.

The wage based limit increases every year when there is a COLA adjustment .  If we raise it even further than the current law says or we eliminate it all together  then without further changes to the benefits formula, the people that pay this higher amount into the Social Security system will get a BIGGER benefit.  And those way on up there in a W2 salary will get a huge benefit.

The Chief Actuary of Social Security also points out that there is also such a thing as a behavioral response from employers - meaning they would look at the total of the amount they would have to pay in salary, taxes and benefits and work it out to their best advantage in some way.

[PaulN872695]

See

https://youtu.be/GfZuB7XSFys?si=1ul3iHv06FVnzIYv

for an interesting explanation and easy solution.

[fffred]

When the FICA cap is raised I wonder if those higher wage earners will then be entitled to the higher benefit as calculated under current law? Or is there some cap planned for that as well? 

How will raising the FICA cap affect the benefits rules?

I suppose at first glance that it is odd that the FICA cap has been raised with inflation but the payroll ceiling for FICA has not.

Taking a tangent:  Now here's a concept:   Old Age benefit is based on 90% of your AIME up to the first "bend point". Currently this is around $14,712. How about making this 100% of the AIME? That's a pretty low income level and it'd almost be worth paying that much more in order to prevent any more carping about low SS benefits.

The 100% might be restricted to those who don't exceed the first bend point (meaning those who exceed the first bend point would still have benefit based on 90% of AIME). Admittedly, there would have to be some tinkering with the arithmetic, so that those who are "just over" the first bend point don't wind up getting a lower benefit than those "just under" that level. Some math genius can work that out.

[PaulN872695]

The maximum benefit you can receive at age 70 is  $4,873, regardless of how much you paid into the FICA fund. Since existing law limits the benefit to $4,873, raising the CAP does not change that.

[fffred]

@PaulN872695 

"The maximum benefit you can receive at age 70 is $4,873, regardless of how much you paid into the FICA fund. Since existing law limits the benefit to $4,873, raising the CAP does not change that."

Existing law does not limit the SS old age benefit to a specified dollar amount. You are correct that the maximum old age benefit someone could receive in 2024 is $4,873. But this amount is not written into law. Instead it derives from the rules (based on law) that determine what a beneficiary's benefit will be, and this value can change from year-to-year.

For the case of a worker who has (i) 35 years of income covered by Social Security, (ii) who also met or exceeded the "ceiling" income (above which it is not subject to payroll OASDI tax), and (iii) who waited to take their benefit at age 70, would receive the maximum SS old age benefit, which calculates out to be the $4,873 value for 2024.

Raising the FICA cap (increasing the ceiling on which the OASDI tax is due) will not itself limit the theoretical maximum possible old age benefit. Rather, increasing the ceiling would result in increasing the maximum possible benefit. This result might even create more harm to the solvency of the system.

Now the law could be changed and it could be changed so that the higher earners might not have their FICA payroll tax capped but they would not be eligible for the higher benefit that would accrue under current law. I suspect this action would certainly be a hot potato in Washington. This would certainly be a "wealth tax".

Here are some helpful references:

Note (1) - a discussion of the maximum possible benefit of $4,873 is given at Investopedia at https://www.investopedia.com/ask/answers/102814/what-maximum-i-can-receive-my-social-security-retire.... They state the same dollar amount for 2024.

Note (2) - you can calculate (and see details of the calculations) by using the "AnyPIA32" software available for download from the SSA, this is best run on a Windows computer. Available at https://www.ssa.gov/oact/anypia/download.html. It may be possible to use some of the on-line SS benefit calculators to run through this scenario as well, but the AnyPIA32 shows all the intricate calculation steps.

[PaulN872695]

You are correct @fffred , i was mistaken about the maximum benefit. It's tided to the cap and as the cap goes up, so does the maximum benefit. 

[GailL1]

@PaulN872695 

You do know that this tax on benefits goes back into the Social Security & Medicare (HI) Trust Funds - it is needed to keep the programs afloat.

This was and still is a modified way to get those who make above the property level to pay more in contributions - 

Think about it as your tax paid on the contributions your employer paid for you during your working years.  

The only people that should not have to pay these taxes on benefits are those who are too poor to even file a tax return.

If we get rid of these taxes on benefits we will be forced to raise the contribution amount for those working and the amount matched by their employer.  It was designed this way so that we got more money into the Social Security and Medicare Trust Funds without taxing the poor or doing harm to those who are currently paying the benefits of those of us already within the programs.

[PaulN872695]

You don't have to raise the FICA tax, just the FICA cap to keep the program afloat. Raising the cap does not raise the tax on working poor or middle class. Not sure why people fail to understand that. The employer portion of FICA is simply a cost to them of your employment and is 6% less they can give you in pay. Their half of the FICA tax. 

[GailL1]

@PaulN872695 As I stated in my reply to @GerardV761134 a few minutes ago - the cap is there only to limit the benefits.  IOW, the max tax cap is directly correlated to the maximum benefit that is calculated to. be paid - so Raise the CAP also raises the benefits.  

There is such a thing as a behavioral response to this also by the employers which would bring in less than expected to the Trust Fund for this raising of the cap.

That is to say, that employers would look at the total amount an employee is costing them in salary, taxes and benefits and then they would make adjustment to accommodate an increase in the taxes they have to pay for the employee.