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June 1, 2011

Close The Social Security "Cap" Tax Loophole!

-- by Dave Johnson

Most people don’t know that there is a huge loophole in the Social Security tax. Believe it or not, after $107K income you don’t pay the Social Security tax at all. This loophole is called the “cap.” The "cap" loophole is bigger than the looholes that let big corporations get out of paying their taxes because while not all corporations avoid taxes the "cap" applies to everyone making over $107K. Closing this loophole would fix all of Social Security's so-called "problems."

The "Cap"

Working people pay into their Social Security account from every dollar they earn but high-income earners only pay on a fraction of what they earn. Most people don't make enough to take advantage of this loophole, so they don't even know about this loophole. But once you reach $106,800 of income you stop paying anything into Social Security.

The Social Security "Problem"

Social Security has built up a huge trust fund of money that people have set aside for their retirement. This trust fund covers everyone's Social Security benefits well into the future. But under some economic assumptions and with continuing concentration of wealth this trust fund begins to run out, and could be gone by approximately 2037. After 2037 the amount coming in from money people set aside could fall short of the amounts going out, and predictions are that without some changes the amounts paid out could be as much as 25% short. Of course, because of cost-of-living adjustments (COLA), benefit checks will be larger than now, even with this potential 25% cut. But this will be a blow to retired people, and should be avoided.

Proposed Solutions

There are several proposals to solve the problem of this potential cut in benefits in the year 2037. Many of these solutions involve schemes to cut benefits now, instead of in 2037, to avoid having to cut in 2037. But for some reason many people are skeptical and do not see the logic of making big cuts in Social Security now in order to avoid possible small cuts later.

Other solutions involve raising the retirement age beyond the current retirement age of 67. People who do not sit at desks in their jobs and have to stand, lift, bend or use their hands worry that they will be unable to work until they die, and would rather see a solution to fixing the problem of a potential shortfall way off in the future than making them continue to work. Also, longevity studies show that people in higher incomes -- the very people receiving the "cap" loophole -- are living longer but not people who make less.

Still other solutions involve "means testing" -- excluding some people from receiving benefits everyone has paid for. This is undemocratic -- we are all in this together and have an equal stake and are entitled to equal benefits. That is what the word "entitlement" means: in a democracy we are all equally entitled to certain things.

These proposals all involve cutting or delaying benefits for recipients. But there is another solution that does not involve benefits: raising the cap on the level of earnings that pay into Social Security.

Raise The Cap

The one solution that is seemingly off the table in plutocratic circles is called "raising the cap." This means fixing the loophole that lets people making over $106,800 stop paying into the Social Security fund. This would, of course, solve the problem of any potential shortfall in Social Security and could even enable restoring a lower retirement age, which would help alleviate the chronic unemployment problem as well.

This post originally appeared at Campaign for America's Future (CAF) at their Blog for OurFuture. I am a Fellow with CAF.

Sign up here for the CAF daily summary.

Posted by Dave Johnson at June 1, 2011 11:20 AM


Comments

WRONG, they paid $6,621.60 last year. The mandate stated that every eligible worker who made above $106,800 in 2010 pay the same amount into Social Security ($6, 621.60) no matter if they made $107,000 or 15 billion (http://www.ssa.gov/pubs/10003.html http://en.wikipedia.org/wiki/Social_Security_Wage_Base).

IE: Every eligible worker pays 6.2% of their income until they reach the cap, $106,800. From that point they only pay 6.2% of 106,800, which is $6,621.60.

This year the amount has been reduced to 4.2% of income for EVERYONE.

I'm all for having democracy in this country but its not going to come if people don't inform themselves of basic truths and facts. Also, I don't believe anyone should be FORCED to pay into any fund unless they choose to. THAT would be democracy.

Posted by: N. Wesley [TypeKey Profile Page] at June 17, 2011 3:41 PM

The Social Security Wage Base (SSWB) is the maximum earned gross income or upper threshold on which a wage earner's Social Security tax may be imposed.

In other words, Taxpayers making over $106,800 have SSI tax withheld only on the first $106,800. Anything above $106,800 is not subject to SSI tax.

Posted by: James Stallings [TypeKey Profile Page] at July 28, 2011 12:26 PM

According to the Congressional Research Office, in a paper titled
"Social Security: Raising or Eliminating the Taxable Earnings Base"
written by Janemarie Mulvey, Specialist in Aging and Income Security
on September 24, 2010,

...

"Raising or eliminating the cap on wages that are subject to taxes could reduce the long-range deficit in the Social Security Trust Funds.

For example, if the maximum taxable earnings amount had been raised in 2005 from $90,000 to $150,000—roughly the level needed to cover 90% of all earnings—it would have eliminated roughly 40% of the long-range shortfall in Social Security.

If all earnings were subject to the payroll tax, but the base was retained for benefit calculations, the Social Security Trust Funds would remain solvent for the next 75 years."

Posted by: James Stallings [TypeKey Profile Page] at July 28, 2011 12:36 PM

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