Workers pay 6.2 percent of their earnings into the Social Security system and employers pay a matching amount up to $113,700 in 2013. Workers who earn more than this taxable maximum in a single year stop paying into Social Security on their earnings and also stop accruing additional benefits for that year.
While most Americans pay just over 6 cents of every dollar they earn into Social Security, the wealthiest Americans pay in a much smaller fraction of their income. High-income workers actually get bigger paychecks beginning the month when their earnings exceed the tax cap because they no longer have to pay Social Security taxes on their income. Someone who earns $113,700 in 2013 will pay the same dollar amount into Social Security as someone who earns $1 million or more, and could potentially qualify for the same payments in retirement.
Overall, about 82 percent of earnings were taxed by Social Security in 2009, down from 91 percent in 1983. "Over the last couple of decades, the share of total earnings covered by Social Security declined because so much more earnings is going to folks at the top of the earnings distribution," says Melissa Favreault, a senior fellow at the Urban Institute. "More of these earnings are untaxed as the earnings distribution has become more polarized."
The Social Security tax rate paid varies considerably by location. In wealthy areas of the country, people pay Social Security taxes on a much smaller share of their earnings, including as little as 63.4 percent in San Mateo, Calif., 59.4 percent in Westchester, N.Y., and 49.3 percent in Fairfield, Conn., according to Urban Institute calculations. And in New York City, workers pay Social Security taxes on less than half (47.7 percent) of their income, the smallest share of income paid into Social Security anywhere in the U.S. "In Manhattan and Silicon Valley, you have some very wealthy people and a tiny fraction of their earnings is going to Social Security," says Richard Johnson, director of the program on retirement policy at the Urban Institute. "When you have a few people making tens of millions of dollars, the share that is subject to the Social Security tax is really quite small, and that can really drive down the rate."
In contrast, in nearby Queens, N.Y., and the Bronx, workers pay the highest share of their earnings into Social Security of any area of the country, with 92.6 percent and 94.4 percent of earnings being taxed, respectively. "People who live in those two bureaus of New York City are making a lot less than $100,000. In Westchester and New York City, people are making a lot more than $100,000 a year, so a lot of their earnings are not taxed by Social Security," says Johnson. "It reflects just how much wealthier people are in Manhattan and Westchester than in the Bronx and Queens." Other places where workers pay Social Security tax on over 90 percent of their earnings include Snohomish, Wash., Macomb, Mich., Marion, Ind., Jackson, Mo., Pierce, Wash., and Wayne, Mich.
Adjusting the Social Security taxable maximum is one potential strategy that could improve Social Security's finances. If Social Security's tax cap was gradually eliminated between 2013 and 2022, it would reduce Social Security's deficit by 71 percent. Or if the tax cap was increased over five years to include 90 percent of all earnings, it would reduce Social Security's funding gap by 30 percent. Adjusting the tax cap would significantly increase taxes on the 5 percent of workers who earn more than the taxable maximum, but many proposals to adjust the tax cap would also give high-income taxpayers somewhat higher benefits when they retire. "Roughly half the additional taxes collected as a result of previous increases in the payroll tax cap resulted in higher benefits for those who had to pay the additional taxes," says Alan Gustman, an economics professor at Dartmouth College.
Three quarters of people whose income exceeded the tax cap in 2011 earned less than $200,000, according to an Urban Institute analysis of Social Security Administration data, while 0.5 percent earned over $1 million. "Most people who earn above the tax cap earn right above it," says Favreault. "There's a lot of people who earn over the tax max just once or twice in their life, and another cluster of people who earn above it for 10 or 15 years."
Increasing Social Security's payroll tax cap is a popular idea, with 68 percent of Americans supporting the complete elimination of the cap, according to a recent National Academy of Social Insurance and Mathew Greenwald and Associates online survey of 2,000 Americans age 21 and older. A 2010 Gallup and USA Today poll found that this change also enjoys strong bipartisan support with 79 percent of Democrats, 60 percent of Republicans and 64 percent of Independents saying it's a good idea to require workers to pay Social Security taxes on all of their wages.
There is less disparity in Medicare tax rates because Medicare taxes are collected differently from those of Social Security. Workers and employers each pay 1.45 percent of worker earnings into the Medicare system, with no annual limit. And for the first time in 2013, there is an additional Medicare tax for high-income taxpayers of 0.9 percent of earnings over $200,000 for individuals and $250,000 for couples.
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