The Social Security Tax Trap

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We all love paying Social Security taxes, don't we?  Both employees and employers have been paying a 6.2% (12.4% in total) Social Security tax for years.  Paid by 164 million American workers, these taxes funded $585 billion distributed to 50 million Social Security recipients in 2007.

In 2008, these Social Security recipients received a 2.3% cost of living adjustment on their payments, so that $585 billion in 2007 will grow by over $13 billion.  Where does this money come from?

Well, the Social Security "wage base" was raised from $97,500 to $102,000 in 2008, a 4.6% increase.  Seems a little unfair!  This means that Social Security taxes are increasing by double the cost of living increase for those earning over the wage base. 

The Social Security Administration says that 12 million American workers and their employers will pay more taxes as a result of the wage base increase.  This translates into up to $6.7 billion in additional taxes, covering about half of the $13 billion increase in payments above.

It ain't gonna get any better.  By 2032, the Social Security Administration says that the proportion of workers to recipients will drop from 3.3 to 2.1.  In other words, from 3 down to 2 tax-paying workers for each recipient in the next 2 decades.  Why?  Because there will be twice as many older Americans as today.  The aging of the baby boomers!

So what can be done?  Our elected officials must take action.  Some of the alternatives that we have seen and may see more of include:

  1. Decrease payments (assuming those of us who haven't retired yet ever see them).
  2. Increase the Social Security tax rate.
  3. Increase the Social Security wage base (which undoubtedly they will continue doing each year).
  4. Increase the official "normal retirement age" for receiving payments (been there, doing that...over the next 20 years the retirement age is increasing from 65 to 67)
  5. Phase out Social Security and allow us to invest our own money.  This is something we've heard about but haven't seen follow-through.  Not a simple matter though.
  6. Everyone please have 5 more kids, raise them and tell them to get a job to pay for our Social Security!  (OK, maybe a little unrealistic.)

What can you do?  Voice your concerns to your elected officials.  But look out for yourself and your retirement by taking advantage of 401k plans, IRAs and other savings vehicles.  Save for the future as best you can.  Save as if Social Security won't exist, and if it does, it'll be icing on your retirement cake.

In the meantime, for those of you affected by this year's annual Social Security wage base increase, just remember, at least someone is benefiting from your loss.

Visit the Social Security Administration website at www.ssa.gov for more information.