What is the fica cap

what is the fica cap

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Should the FICA Tax Earnings Cap Be Eliminated?

Joseph J. Thorndike

Sen. Mark Begich has big plans for Social Security, and they start with a big tax increase. Earlier this month, the Alaska Democrat outlined a plan to "strengthen the Social Security program" by eliminating the earnings cap for FICA taxes and raising the benefits paid to program participants.

According to Begich's office, the Protecting and Preserving Social Security Act 1 would extend the solvency of Social Security for 75 years. "Our seniors and persons with disabilities need the security of knowing the benefits they earned during decades in the workforce will be there for them when they need them most," Begich said in a release.

The tax changes that Begich has in mind are dramatic. His bill would lift the payroll tax cap entirely. The cap (also known as the taxable earnings base) is adjusted annually to reflect wage growth in the economy. It is currently pegged at $110,100; in 2013 it will rise to $113,700.

Lifting the wage cap has implications for both taxes and benefits under Social Security. As the Congressional Research Service stated in a 2010 report:

The taxable earnings base serves as both a cap on contributions and a cap on benefits. As a contribution base, it establishes the maximum amount of each worker's earnings that is subject to the payroll tax. As a benefit base, it establishes the maximum amount of earnings used to calculate benefits. 2

Begich says his legislation would retain the connection between taxes paid and benefits received. "From the beginning, Social Security has linked an individual's contributions to the amount of benefits, and that won't change," according to a fact sheet from his office. "Every additional dollar a person pays into Social Security under this bill earns them higher benefits and increases the financial security of their families."

The Begich bill would lift the cap incrementally, not all in one fell swoop. "Under this proposal the income cap is lifted gradually over seven years," the fact sheet says. "For example, a worker earning $150,000 would pay about $321 more in FICA in Year 1 (about $13 per paycheck) and then an additional $321 annually through Year 7." Employers would pay FICA taxes on the portion of wages above the cap for each affected employee.

Warm Reception

The Begich bill is a good example of aspirational lawmaking -- meaning it has no chance of passage but lots of admirers. David Dayen, writing for the left-leaning collaborative blog Firedoglake, described the bill as "an excellent piece of legislation," lauding both its benefits increases and its tax increase. "If you lift the cap you don't just bring the program into balance, but you can adjust the system so it adequately reflects senior costs and pays out in a manner to cover them. This will be a tremendous boon at the low end of the scale, and in a country with virtually no other retirement mechanism anymore, it's practically vital," he wrote. 3

Similarly, a writer for the progressive AMERICAblog summarized the bill in glowing terms: "Kill the salary cap; adjust COLA the right way, to sweeten the benefits,

not strangle them. Way to go, Senator. Thanks." 4

Even among liberals, however, the Begich bill is not without its problems. In particular, lifting the payroll tax cap would require a violation of President Obama's pledge to never, ever raise taxes on middle-income earners (assuming Obama sticks to his $200,000/$250,000 threshold for middle-income singles and couples). That problem might be finessed with some sort of "donut hole" that shielded people earning more than the old cap but less than the middle-income mark. Indeed, Obama proposed something similar in 2008.

Tax experts, however, find little to like in that sort of solution. As Diane Lim Rogers of the Concord Coalition wrote at the time:

This strikes me (and Len Burman of the Tax Policy Center) as a very messy and inefficient way to try to introduce more progressivity into the federal tax system. It doesn't work well because it goes at it through the wrong tax instrument, through a payroll tax that is intended to be mostly proportional in incidence, instead of going at it through the parts of the federal tax system that are actually intended to be progressive -- such as, for example, the individual income tax, and in particular (if we care mostly about adding progressivity at the very top) the alternative minimum tax. 5

Long History

Eliminating the cap would mark a break with history. When President Franklin Roosevelt first offered his plan for Social Security, it did not include a maximum taxable earnings limit -- or at least not the one eventually added to the legislation. Instead, the Roosevelt plan completely exempted high earners from Social Security, including both taxes and benefits. Anyone making more than $3,000 annually (roughly $47,000 in today's dollars) would have been left outside the system. 6

As FDR's plan made its way through Congress, the exemption for high earners disappeared. The House Ways and Means Committee replaced it with a tax cap, also pegged at $3,000 in annual income (although that was $3,000 per employer, so an individual with more than one job might actually have paid taxes on income above $3,000).

The best historical work on the cap has not uncovered exactly why the committee preferred an earnings cap over an exemption. But according to a CRS report, "concerns about tax equity and attaining as much program coverage of the workforce as possible" played a key role. "Not covering them meant that they would not pay the tax where lower-wage earners would, and coverage would be erratic for workers whose earnings fluctuated above and below the $250 monthly threshold," the CRS said. 7

Once on the books, the earnings cap remained unchanged for more than a decade. Beginning in 1950, the cap saw a series of occasional changes, as lawmakers tinkered with it "to help meet the financing needs of the program, and to keep up to date with changing earnings levels." 8 Since 1982, the cap has risen automatically at the same rate as wages in the economy.

  Social Security's Maximum Taxable Earnings,

 ___________________________________________________________________

  1937 - 1950 $3,000

  1951 - 1954 $3,600

  1955 - 1958 $4,200

  1959 - 1965 $4,800

Source: www.taxhistory.org

Category: Insurance

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