The Social Security Administration (SSA) Office of the Chief Actuary (OCA) has projected that the Social Security wage base will increase by at least $3,500 in 2012. It has been $106,800 since 2009. The projections, which extend through 2020, were included as part of the annual report to Congress by the Board of Trustees of the Federal Old-Age and Survivors Insurance and Federal Disability Insurance Trust Fund programs.
Background. The Federal Insurance Contributions Act (FICA) imposes two taxes on employers, employees, and self-employed workers—one for Old Age, Survivors and Disability Insurance (OASDI; commonly known as the Social Security tax), and the other for Hospital Insurance (HI; commonly known as the Medicare tax).
In general, the FICA tax rate for employees and employers is 7.65% each—6.2% for OASDI and 1.45% for HI. For self-employed workers, the FICA tax is 15.3%—12.4% for OASDI and 2.9% for HI. However, the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (2010 Tax Relief Act, P.L. 111-312) reduced the employee OASDI tax rate under the FICA tax by two percentage points, to 4.2%, for remuneration received during 2011. As a result, for 2011, employees will pay only 4.2% Social Security tax on wages up to $106,800. The employer tax rate for Social Security remains unchanged at 6.2%. According to the Joint Committee on Taxation, the estimated budgetary effects of this reduction are approximately $67.2 billion in 2010 and $44.4 billion in 2011.
The maximum amount of compensation subject to the OASDI tax is known as the wage base. (No such maximum exists for HI.) For 2009 through 2011, the wage base has remained at $106,800. The wage base has two primary functions: it caps the amount of earnings that are subject to OASDI tax, and it also caps the amount of earnings that are later used to calculate the benefits that the worker will receive.
Projected increases through 2020. The SSA provides three kinds of forecasts for Social Security wage bases: intermediate, low cost, and high cost. The SSA intermediate forecasts through 2020 are as follows:
2012 — $110,700
2013 — $114,900
2014 — $120,000
2015 — $125,400
2016 — $130,800
2017 — $135,900
2018 — $141,300
2019 — $146,700
2020 — $153,300
The wage base is also projected to be $110,700 in 2012 under the low cost forecast. It would be $110,400 under the high cost forecast. The wage base would reach $159,900 in 2020 under the high cost forecast.
Actual annual increases to the wage base are announced in October of the preceding year and are based on then-current economic conditions. As a result, the OCA's forecasts, especially the longer-range ones, are subject to change. However, the OCA correctly projected last year that the Social Security wage base would remain at $106,800 in 2011.
Other issues raised in SSA's report. In addition to projecting increased wage bases, the SSA also provided general conclusions and observations regarding the long-term viability of Social Security. Based on a number of factors, notably including the aging of the "baby boom" population and the increase in life expectancy, the SSA projected that Social Security should be able to fully pay scheduled benefits until the trust funds are exhausted in 2036. (Last year's report projected that the funds would be exhausted in 2037.) After 2036, the amount of non-interest income is projected to cover approximately 77% of the cost of Social Security.
The SSA also notes two other alternatives to eliminate Social Security's shortfall—namely, increasing taxes or reducing benefits. The scheduled benefits could be paid for by raising payroll taxes beginning in 2036, initially to 16.4% and slowly increasing until approximately 16.9%. Alternatively, benefits could be reduced to match the scheduled tax rates, starting with a 23% reduction in 2036 and gradually increasing to 26%.
Impact of raising or eliminating the wage base. According to a 2010 Congressional Research Service (CRS) report, although the wage base has risen at the same rate as average wages since'82, the actual percentage of covered earnings that are subject to OASDI tax has dropped from 90% in'82 to 85% in 2005, and is projected to further decline to 83% for 2014. This decrease is attributable to greater earnings inequality. Although the percentage of the population with incomes below the wage base has remained fairly consistent at approximately 94% since the'80s, the earnings of those above the wage base have risen faster than the average.
According to the CRS, if the wage base were to be eliminated in 2013, this change would result in approximately 21% of beneficiaries paying additional payroll taxes at some point during their lives. For individuals affected by this increase, their total lifetime payments would grow by 3%, and benefits received would grow by 2%, as compared to current law.
CRS further noted that raising or eliminating the wage base could reduce the long-term Social Security deficit. For instance, if the wage base were eliminated for contribution purposes, but retained for benefit calculation purposes, Social Security would remain solvent for 75 years.
References: For the FICA tax rate and wage base, see FTC 2d/FIN ¶H-4687; United States Tax Reporter ¶35,014.07; TaxDesk ¶541,002; TG ¶9501.