Ask the grumpies: Why did they stop taking social security taxes out?

High earner asks:

I just noticed that for the last few months of 2014, there was no social security tax deducted from my salary, and then in January, it went back up to where it was before that. Does that make any sense???

then a follow-up:

I think I just figured it out. Do they deduct the standard percent each month of the calendar year until you reach the maximum based on the annual taxable limit of $117,000, and then they stop deducting?

We at grumpy rumblings thank high earner for answering hir own question.  (Note:  In 2015, the maximum amount of taxable earnings is $118,500.)  When policy makers talk about eliminating the tax cap on Social Security, this is what they’re talking about.

We are pro- this tax cap elimination because it comes as a surprise to most people the first time they hit it!  (And it’s a lot more progressive than cutting Social Security benefits for people who need them, though some cuts make sense given longer working lives.) In the mean time, though, we wish we earned more money so we could take advantage of it…

20 Responses to “Ask the grumpies: Why did they stop taking social security taxes out?”

  1. ricodilello Says:

    It is too bad that social security will run out of money because excess premiums are being invested in government bonds.

    • nicoleandmaggie Says:

      You’re talking to the wrong expert here. Playing the stock market with social security is irresponsible and stupid. I know 2008 was a long time ago, but … the stock market does go down while the gov’t still has to meet its obligations.

      It also has the chance of lowering stock market premiums overall, according to the GAO. We don’t know the full general equilibrium implications.

      Also, Social Security won’t run out of money– it will still be taking in money when the trust fund is depleted.

      Social Security can actually be “fixed” with a few small tweaks, one of which being eliminating the tax cap.

      • ricodilello Says:

        Real return on government bonds (after inflation) is almost negative, Clinton was the last president to have a balanced budget, so where is the government going to get the money to pay out social security in the future?

      • nicoleandmaggie Says:

        I’m not going to argue with you about this because you’re not paying me to (and I get paid quite a bit to talk about economics). Boston College has some very nice pamphlets that spell everything out regarding Social Security and all of the options. Look up the Center for Retirement Research and their guides to Social Security policy.

      • nicoleandmaggie Says:

        Also if you look on Youtube for Peter Orzag Social Security, he gives an excellent talk explaining all of the ins and outs of SS and the SS “problem” that he’s given several places.

        And, of course, the real problem is Medicare.

      • ricodilello Says:

        I am Canadian and our social security is in a surplus position because the pension plan is allowed to buy stocks, shopping malls, toll roads, sport teams …etc The managers invest in markets world wide with very few restrictions. However our government run Medicare is also in big trouble.

      • nicoleandmaggie Says:

        Canada’s equivalent to Social Security (Old Age Security) is funded out of General Revenues. It is not a pay as you go system [update: this is incorrect, see below]. Canada is not gambling with its baseline retirement annuities.

        Canada’s other pension systems are more similar to DB employer plans, or if there were a government option for investing an IRA. You seem to be talking about the Canadian Pension Plan. It is unlikely that a thing like that would have even the remotest chance of working in the US without major banking and investment reform, which is extremely unlikely to happen. The potential for corruption and industry capture is far too high.

      • ricodilello Says:

        I thought that U.S. social security is similar to our Canada pension plan which is funded by employee & employer contributions which is fully funded. Yes, our old age security is funded by government but it is only for low income seniors. You only get it if your retirement income is below an income cap. (welfare for seniors) Current maximum monthly pay out is $550 per month.

      • nicoleandmaggie Says:

        Ah, then that one is like SSI, not SS. In any case, Canada and the US are different. The most recent version of Social Security Around the World (I think by Venti and Wise, possibly also Gruber) discusses the pros and cons of different systems. this month also discusses privatized social security in the context of Mexico.

  2. First Gen American Says:

    I also think eliminating the SS cap is a no brainer. Most people fortunate enough to be making that kind of money aren’t going to notice that extra $50-$100 difference in take home pay at that income level.

    I get paid bi-weekly and my take home paycheck fluctuates about $100 up for down for various withholding reasons. It’s not noticeable even to me who’s anal with numbers. If you’re fortune enough to be a high earner and netting over $1000 per week after all the various deductions, $50 isn’t going to hit the radar for most people.

    • nicoleandmaggie Says:

      I think it’s actually a bigger $ difference in take-home pay just because their income is so much larger.

    • Leigh Says:

      I get paid monthly and it’s an extra ~$600/month, soon to be more than that with the raise I got with the new job. That is definitely a noticeable sum to get extra in the later portion of the year.

      That said, I am totally okay with eliminating the cap in favor of more taxes to take care of old people better. I would also be okay with raising taxes to improve health insurance for the masses. I am NOT okay, however, with paying more taxes when you’re married versus being single. (It’s not getting married that saves you money, but living together.)

      • First Gen American Says:

        You net $600/month more? My gross amount is $256 biweekly. I guess it would vary depending on how high an earner you are and when you hit the cap. Then once they take out state and federal income taxes at the top end of the tax brackets, the net amount ends up being well under $100/week for me.

        With all my various 401k, insurances, flex spending, and charity witholdings mucking up my paycheck it ends up being like a $40/week difference. But with taxes witholdings alone it’s still under $100/week. I still maintain that is not a lot of extra take home pay for a high earner when it is only 2-3 months of the year.

      • nicoleandmaggie Says:

        I believe it is something like 7% that they stop taking out, but don’t quote me on that.

      • Leigh Says:

        Yeah, I net an extra $600-700/month once Social Security tax is fully paid and then the end of year bonuses don’t pay any at all, which is a big savings (> $1,000). It’s been anywhere from an extra 3-6 months, which is a decent chunk, but not that much extra.

      • nicoleandmaggie Says:

        Unfortunately, there is no way to have a tax system that is progressive, treats families equally and treats singles equally. It just isn’t mathematically possible. You would get a marriage bonus instead of a penalty if you earned unequal amounts.

      • Rosa Says:

        it’s 6.2%. The other 1.45% in the FICA taxes is not subject to the cap (I think it’s Medicare? It’s labeled HI for Hospital Insurance). And that one is actually progressive – it’s 1.45% on the first $200,000 in income and slightly higher for anything over $200K.

        We just covered this in my payroll class.

    • Rosa Says:

      Yes, and we’re a family that hits the cap (not me, blame my high-earning husband). It would not hurt us to pay the OASDI on those last few checks of the year.

      Let’s make capital gains taxes on stocks equal to income taxes, while we’re at it, so work and ownership are evenly taxed. One advantage to doing our own taxes is that every year I see how tax-advantaged we are, now that we have & make so much money.

  3. Comradde PhysioProffe Says:

    “Most people fortunate enough to be making that kind of money aren’t going to notice that extra $50-$100 difference in take home pay at that income level.”

    High earner here! First, it’s a *lot* more than that. Second, I am totally in favor of eliminating the cap even though it would cost me a lot of money. It is worth it to me to pay more taxes so that we can live in a decent country where old people are taken care of and can live comfortably even if they aren’t rich.

    • Linda Says:

      Agreed. I wouldn’t have a problem paying that extra in either. Around late October/November each year I always get super duper paychecks because I’ve topped out my 401(k) contributions and have hit that cap. I have no problem paying more than I am now.

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