In late October, the Social Security Administration (SSA) quietly released a shocking announcement that received little attention: the payroll tax is set to increase for 12 million Americans.
Yet, that tax only applies to wages up to a certain level, and for 2016, an amount equal to $118,500. That level, or wage cap, is known in government parlance as the “maximum taxable earnings.”
The maximum taxable earnings cap routinely increases, and has since about 1937. As you can see from the chart, below, between 1937 and 1950 the payroll tax only applied to wages up to $3,000. But by law, that number is eligible to increase based on the rise in the average Consumer Price Index for Urban Wage Earners (CPI-W). In other words, to keep up with wage inflation.
Historically, the maximum taxable earnings stayed relatively the same until about 1977; after which, the earnings cap threshold unfolded into a tidal wave of nearly perpetual increases.
Fast forward to 2016, and 173 million workers pay Social Security payroll taxes. But in 2017, 12 million workers are about to face a larger tax bill. That’s a result of the increase in the maximum taxable earnings level from $118,500 this year to $127,200 next year. In other words, workers who make over $118,500 per year will now start paying 6.2 percent on each additional dollar earned up to the new, higher cap.
This year’s tax increase is particularly notable, as it will be the largest percentage increase in the taxable earnings cap since 1983 — an increase of almost $9,000. That is mostly the result of the federal law, which says that the maximum taxable earnings can’t be increased if Social Security doesn’t provide a cost-of-living adjustment to Social Security benefits. In 2016, Social Security benefits went unchanged, as did the maximum taxable earnings cap. In 2017, however, benefits are set to increase by 0.3 percent. Those benefit increases open the door to this large payroll tax hike. To put that in perspective, anyone making more than the $127,200 per year will see their tax bill increase by $539; for anyone self-employed, $1,079.
Although this process has happened often since the late 1930’s, the question is whether automatic tax increases, particularly one as large as this, should happen at all? Of course, if the maximum taxable earnings cap no longer increased, Social Security would become insolvent sooner than expect.
Yet, even with these expected tax increases, Social Security still needs more than $11.4 trillion in the bank today to pay out future benefits — that’s more than $91,935 per family. That means that even as Social Security payroll taxes increase, the program is still anticipated to run out of money by 2034.
The hard reality is that increasing payroll taxes only delays the inevitable insolvency. If Congress is going to keep raising Social Security taxes, serious programmatic reforms are needed. For instance, even if Congress increased the maximum taxable earnings to $319,900 by 2025 — double the projected current-law estimate, the Social Security Trust fund would only be improved by 40 percent. In other words, this option would only delay the program’s bankruptcy by four years!
And, even if Congress decided to remove the maximum taxable earnings cap altogether, i.e. impose the Social Security payroll tax to every dollar a worker earns, Social Security would still run into bankruptcy issues. Per the Congressional Budget Office (CBO), such an option would replenish the Social Security Trust Fund by only 70 percent — it would delay bankruptcy by a measly decade (or until 2044).
As the maximum taxable earnings quietly increase, year after year, workers will send more of their hard-earned dollars to Washington. Yet, without meaningful reforms, it will do nothing to save Social Security for future beneficiaries. If the populace, and especially Washington politicians, refuse to meddle with Social Security reforms for the sake of the false populist narrative that doing nothing somehow “protects” Social Security benefits, then perhaps we should fix it for the sake of protecting more of our tax dollars from being used to prop up yet another failing government program.
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