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January 03, 2023 at 10:32 AM
What You Need to Know
- Taxing income only up to $160,200 for Social Security is leaving a lot of revenue on the table.
In the first few days of 2023, at least 500 US workers will likely have already paid their Social Security taxes for the year.
That’s because in just a day they earn the maximum amount of income subject to Social Security tax, or $160,200. Those are just executives at public companies where salaries are disclosed, such as Apple Inc. CEO Tim Cook, who earned $98 million in 2021, and Intel Corp. CEO Patrick Gelsinger, who took home more than $177 million. (Their salaries for 2022 have yet to be disclosed, but it’s safe to assume that once again they will hit the tax cap immediately.) Scores more executives at private companies fall into the same category.
Here’s how the system works. To help pay for Social Security, a tax of 12.4% is split between employees and employers; a worker is subject to a 6.2% tax assessed on earnings up to a certain amount — $160,200 in 2023.
Over the past four decades, Social Security’s taxable wage base has shrunk because workers are paid more in non-taxed benefits, such as health insurance. In addition, people earning high wages have received bigger raises than the bottom 95% of earners.
Looking Ahead
No surprise, Social Security will only be able to pay 76% of promised benefits by 2033 if nothing changes. The payroll tax would have to increase by 3.47 percentage points from the current 12.4% to be able to guarantee promised benefits for the next 75 years.
But raising the payroll tax rate on existing workers is near-impossible politically. An easier solution would be to eliminate the earnings cap while leaving benefits as is. The extra revenue would solve the financial gap for 35 years, according to a report by the Congressional Research Service.
