SOCIAL SECURITY TAX AND THE MAXIMUM TAXABLE INCOME LIMIT |
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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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