Watson Buckle Blog
President Obama raising Social Security on high earners
Back in April, Barack Obama began to endorse one of the proposals made by his Bowles-Simpson fiscal commission - increase the amount of income subject to Social Security taxes.
In the USA, the Social Security tax is imposed only on the first $106,800 of annual earned income. The Congressional Budget Office said increasing the maximum amount of taxable wages to $170,000 in 2012 and beyond would raise $468 billion in revenue over ten years.
Speaking in April, President Obama said: “For the vast majority of Americans, every dime you earn, you're paying some in Social Security. But for (billionaire investor) Warren Buffett, he stops paying at a little bit over $100,000 and then the next $50 billion he's not paying a dime in Social Security taxes.”
For billionaires, a large part of their income comes not from wages, but from capital gains, dividends, and other investment income. This means that non-wage income is not subject to Social Security taxation.
In 2008, more than 3.8 million tax returns in the US showed salary and wage income of more than $200,000.
In the US there has always been some connection between wages earned and Social Security benefits received. A worker with a lifetime of above-average wages will get benefits higher than those of a worker with a lifetime of average or below-average wages.
However, there is a maximum Social Security retirement benefit. For example, for a worker retiring at age 66 this year, the maximum annual retirement benefit is $28,392.
Raising taxes on higher earners would make Social Security more of an income transfer system - it would mean taking money from those who earn more, and giving it to those who earned less while they were working.
To some degree, Social Security already does this redistribution in the way its benefit formula is designed, but Obama’s proposal would nudge the system further in that direction.
John Kinsella
Tax Partner
