Q: I work in human resources. The maximum amount of earnings that are taxable for Social Security shot up in 2017 after staying the same amount for two years in a row. When the change went into effect in January I was questioned and even accused of withholding too much from paychecks of the higher earners here. Can you tell me why this taxable amount rose so much, and how the government arrives at that number?
A: The maximum amount of earnings subject to Social Security payroll taxes increased substantially in 2017, from $118,500 in 2016 to $127,200 in 2017. That’s a jump of 7.3%, making it the largest in the program’s history. But that increase is based on strong growth in wages over two years, since 2015, not just over one year as is more typically the case. By law, the maximum amount of earnings subject to Social Security taxation is not increased when there is no annual cost-of living adjustment (COLA). With no COLA in 2016, the taxable maximum stayed at $118,500 for two years.
Social Security is financed by a 6.2% tax on earnings paid by workers that is matched by another 6.2% paid by the employer. The maximum amount of earnings subject to Social Security taxation is normally adjusted every year, using the index that measures growth in average wages.
Your higher - earning coworkers shouldn’t grumble. Had the maximum taxable earnings been adjusted in 2016 as usual, the taxable amount would have been $122,648 instead of $118,500. That’s a difference of $4,148. Those higher - income earners got a payroll tax break of up to $257 each and your employer did not have to match that for the whole year.
But this mini-windfall adds up to a loss of revenue for Social Security when the maximum earnings amount doesn’t keep up with average wage growth. It can also limit the amount higher earners receive in retirement income later, because Social Security benefits are calculated only on earnings at or below the taxable maximum for each of the 35 highest-earning years.
While Social Security is still forecast to pay benefits until 2034, the program will experience financing problems sooner than that and the GOP is proposing big cuts to the program that would affect all beneficiaries. According to TSCL surveys, older Americans overwhelmingly support raising the taxable maximum. Doing so is estimated to keep Social Security solvent for another 45 to 60 years.