Social Security tax rates, how much is enough?

Some observers of the coming (here now actually) Social Security crisis, see the solution in simply raising taxes. Of course, to some that means raising taxes on the wealthy alone.

In 2011 the tax rate for Social Security is 6.2% of wages up to $106,800 on both worker and employer. In its infinite wisdom Congress “stimulated the economy” and made the Social Security Trust Fund weaker by lowering worker taxes to 4.2% for this year.

Ida May you don’t know how lucky you were

The question is how much would taxes have to rise to cover Social Security obligations. Here is what the Social Security Trustees estimate:

Under current projections, the annual cost of Social Security benefits expressed as a share of workers’ taxable wages will grow rapidly from 11-1/2 percent in 2007, the last pre-recession year, to roughly 17 percent in 2035, and will then dip slightly before commencing a slow upward march after 2050.

In other words both worker and employer would each have to contribute 8.5% of taxable wages in the future to cover benefits. Remember, that is just to cover benefits. Up until 2010 taxes exceeded benefits so there was additional revenue to purchase Treasury Bonds for the Trust Fund.

As for taxing the “wealthy” there aren’t enough of them to carry the load. Also, keep in mind that the Medicare tax already has no limit on taxable earnings and beginning in 2013, the health care reform law increases the Medicare Part A (hospital insurance) tax rate on wages by 0.9% (from 1.45% to 2.35%) on earnings over $200,000 for individual taxpayers and $250,000 for married couples filing jointly and imposes a 3.8% assessment on unearned income for higher-income taxpayers.

The fact is that unless there are changes in the benefit structure for Social Security, related taxes are going up for everyone (in addition to other tax increases).

If you buy a bigger house, your mortgage payment and your taxes go up, if you charge more on a credit card, your minimum payment goes up. When you can’t afford to make your payments, you either increase your income, buy a smaller house or lose all your stuff…or I suppose you can get your wealthy neighbor to pay your bills.