Location:
SOCIAL SECURITY; TAXES - INCOME;

OLR Research Report


SOCIAL SECURITY TAX AND THE MAXIMUM TAXABLE INCOME LIMIT

By: Alex Reger, Legislative Analyst II


ISSUE
Explain the Social Security tax. Provide historical background and justification for the tax's maximum taxable income limit.

SUMMARY

Social Security, also known as Old-Age, Survivors, and Disability Insurance, provides partial income replacement due to retirement, disability, or death. It is funded primarily by the Social Security tax, which is imposed on all earned income (excluding investment income) up to a maximum taxable income limit. The maximum limit, which increases annually according to growth in the national average wage index, is $118,500 for 2016. Any income above the limit is not subject to the tax.

The maximum taxable income limit has been a feature of the tax since its inception in 1937. It has been increased numerous times, either on an ad hoc basis or by automatic formula increases set by Congress. According to the federal Office of Retirement and Disability Policy, the maximum taxable income limit generally serves to (1) maintain the relationship between preretirement earnings and benefit levels as wages rise, (2) reduce Social Security's projected funding shortfall, and (3) create a less regressive payroll tax structure.

SOCIAL SECURITY TAX

The Social Security tax is the combination of the Old Age and Survivors Insurance (OASI) tax and Disability Insurance (DI) tax. Both employees and employers pay OASI and DI taxes. Self-employed individuals must pay the employee and employer portions of the taxes. The current Social Security tax rate is 6.2%, which yields a combined employee and employer rate of 12.4%. Due to the maximum taxable income limit, employees and employers will pay a maximum of $7,347 each in Social Security tax in 2016.

The maximum taxable income limit has risen from $3,000 in 1937 to $118,500 in 2016. Since 1982, when the current funding formula was set, it has increased every year except for the periods from 2009 to 2011 and from 2015 to 2016.

Table 1 shows the Social Security tax rates and maximum taxable income limit from 1937 to 2016.

Table 1: Social Security Tax Rates as a Percentage of Taxable Earnings

and the Maximum Taxable Income Limit from 1937-2016

Years

OASI

DI

Tax Rate for Employees and Employers (OASI + DI)

Tax Rate for Self Employed Workers

Maximum Taxable Income Limit

1937-1949

1%

--

1%

--

$3,000

1950

1.5

--

1.5

--

3,000

1951-1953

1.5

--

1.5

2.25%

3,600

1954

2

--

2

3

3,600

1955-1956

2

--

2

3

4,200

1957-1958

2

0.25%

2.25

3.375

4,200

1959

2.25

0.25

2.5

3.75

4,800

1960-1961

2.75

0.25

3

4.5

4,800

1962

2.875

0.25

3.125

4.7

4,800

1963-1965

3.375

0.25

3.625

5.4

4,800

1966

3.5

0.35

3.85

5.8

6,600

1967

3.55

0.35

3.9

5.9

6,600

1968

3.325

0.475

3.8

5.8

7,800

1969

3.725

0.475

4.2

6.3

7,800

1970

3.65

0.55

4.2

6.3

7,800

1971

4.05

0.55

4.6

6.9

7,800

Years

OASI

DI

Tax Rate for Employees and Employers (OASI + DI)

Tax Rate for Self Employed Workers

Maximum Taxable Income Limit

1972

4.05

0.55

4.6

6.9

9,000

1973

4.3

0.55

4.85

7

10,800

1974

4.375

0.575

4.95

7

13,200

1975

4.375

0.575

4.95

7

14,100

1976

4.375

0.575

4.95

7

15,300

1977

4.375

0.575

4.95

7

16,500

1978

4.275

0.775

5.05

7.1

17,700

1979

4.33

0.75

5.08

7.05

22,900

1980

4.52

0.56

5.08

7.05

25,900

1981

4.7

0.65

5.35

8

29,700

1982

4.575

0.825

5.4

8.05

32,400

1983

4.775

0.625

5.4

8.05

35,700

1984

5.2

0.5

5.7

11.4

37,800

1985

5.2

0.5

5.7

11.4

39,600

1986

5.2

0.5

5.7

11.4

42,000

1987

5.2

0.5

5.7

11.4

43,800

1988

5.53

0.53

6.06

12.12

45,000

1989

5.53

0.53

6.06

12.12

48,000

1990

5.6

0.6

6.2

12.4

51,300

1991

5.6

0.6

6.2

12.4

53,400

1992

5.6

0.6

6.2

12.4

55,500

1993

5.6

0.6

6.2

12.4

57,600

1994

5.26

0.94

6.2

12.4

60,600

1995

5.26

0.94

6.2

12.4

61,200

1996

5.26

0.94

6.2

12.4

62,700

1997

5.35

0.85

6.2

12.4

65,400

1998

5.35

0.85

6.2

12.4

68,400

1999

5.35

0.85

6.2

12.4

72,600

2000

5.3 

0.9

6.2

12.4

76,200

2001

5.3 

0.9

6.2

12.4

80,400

2002

5.3 

0.9

6.2

12.4

84,900

2003

5.3 

0.9

6.2

12.4

87,000

2004

5.3 

0.9

6.2

12.4

87,900

2005

5.3 

0.9

6.2

12.4

90,000

2006

5.3 

0.9

6.2

12.4

94,200

Years

OASI

DI

Tax Rate for Employees and Employers (OASI + DI)

Tax Rate for Self Employed Workers

Maximum Taxable Income Limit

2007

5.3 

0.9

6.2

12.4

97,500

2008

5.3 

0.9

6.2

12.4

102,000

2009

5.3 

0.9

6.2

12.4

106,800

2010

5.3

0.9

6.2 (Employers did not have to pay for qualified new hires)

12.4

106,800

20111

5.3 (3.3 for employees)

.9

6.2 (4.2 for employees)

10.4

106,800

20121

5.3 (3.3 for employees)

.9

6.2 (4.2 for employees)

10.4

110,100

2013

5.3 

0.9

6.2

12.4

113,700

2014

5.3 

0.9

6.2

12.4

117,000

2015

5.3 

0.9

6.2

12.4

118,500

2016

5.3 

0.9

6.2

12.4

118,500

Source: Reproduced from the Social Security Administration, Social Security Tax Rates website, with additions from the Benefits Planner: Maximum Taxable Earnings (1937 - 2015) and Contribution and Benefit Base websites.

Note: 1As part of a federal stimulus program, the employee rate was cut to 4.2% for 2011 and 2012.

The Social Security tax is combined with the Medicare tax to form what is commonly known as the Federal Insurance Contributions Act (FICA) tax. The Medicare tax is 1.45% of gross wages on all earned income for 2016, and like the Social Security tax, is imposed on both employees and employers (yielding a combined rate of 2.9%). Unlike the Social Security tax, there is no limit on the amount of wages subject to the Medicare tax.

MAXIMUM TAXABLE INCOME LIMIT

Origin and History

According to a Congressional Research Service (CRS) Report, President Roosevelt's Committee on Economic Security, which helped craft the Social Security program, did not recommend a maximum taxable income limit and the original draft of the bill did not include one. The President's proposal was focused on low-income retirees and thus exempted certain high-income individuals from paying into the Social Security system (those making at least $250 per month or $3,000 per year).

The House Ways and Means Committee eliminated the exemption for high-income individuals but imposed a $3,000 maximum income limit. As a result, all workers paid into the newly created Social Security system. According to the CRS report,

the committee report and floor statements give “no clear record” as to why the limit was included.

Increases

According to the federal Office of Retirement and Disability Policy's report on The Evolution of Social Security's Taxable Maximum, the limit has been modified several times to address various policy goals, including improving program financing and maintaining or increasing benefits for middle and high earners. Since 1982, the law requires the Social Security Commissioner to raise the maximum taxable income limit whenever cost of living adjustments (COLAs) are granted to Social Security recipients. (COLAs are indexed to national wages). Table 2 shows years in which the maximum taxable limit was changed and the policy rationale for the change.

Table 2: Maximum Taxable Income Changes and Policy Rationales, 1937-2016

Years

Policy Rationale

1937–1950

Original amount; set by the House Ways and Means Committee

1951–1954

Ad hoc increases set by Congress; Intended to maintain benefits that would more closely resemble preretirement income for middle- and higher-income workers while also increasing program revenue

1955–1958

1959–1965

1966–1967

1968–1971

1972

Levels set by the 1972 amendments; The 1972 amendments set the 1974 level at $12,000; Subsequent legislation raised the maximum to $13,200 (Legislation enacted in July 1973 (Public Law 93-66) and in December 1973 (Public Law 93-233) further expanded benefits by adding to the maximum increase scheduled for 1974, respectively raising it from $12,000 to $12,600 and then to $13,200.)

1973

1974

1975

Levels set by wage indexing formula of 1972 amendments

1976

1977

1978

1979

Ad hoc increases to levels determined by wage indexing formula; Addressed system financing problems created by the "flawed" benefit formula in the 1972 amendments

1980

1981

1982–2016

Levels set by wage indexing; indexing formula was adjusted slightly by the Omnibus Budget Reconciliation Act of 1989

Source: Reproduced from the Social Security Administration, Social Security and Medicare Tax Rates and Contribution and Benefit Base websites.

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