2016 Annual Report Of The Board Of Trustees Of The Federal Old-Age And Survivors Insurance And Federal Disability Insurance Trust Funds.
The Social Security Administration’s Office of the Chief Actuary (OCA) has projected, under two out of three of its methods of forecasting, that the Social Security wage base will increase from $118,500 for 2016 to $126,000 for 2017.
Background. The Federal Insurance Contributions Act (FICA) imposes two taxes on employers, employees, and self-employed workers—one for Old Age, Survivors and Disability Insurance (OASDI; commonly known as the Social Security tax), and the other for Hospital Insurance (HI; commonly known as the Medicare tax).
The FICA tax rate for employers is 7.65%—6.2% for OASDI and 1.45% for HI.
For 2016, an employee will pay:
- a. 6.2% Social Security tax on the first $118,500 of wages (maximum tax is $7,347.00 [6.2% of $118,500]), plus
- b. 1.45% Medicare tax on the first $200,000 of wages ($250,000 for joint returns; $125,000 for married taxpayers filing a separate return), plus
- c. 2.35% Medicare tax (regular 1.45% Medicare tax + 0.9% additional Medicare tax) on all wages in excess of $200,000 ($250,000 for joint returns; $125,000 for married taxpayers filing a separate return). (Code Sec. 3101(b)(2))
For 2016, the self-employment tax imposed on self-employed people is:
- 12.4% OASDI on the first $118,500 of self-employment income, for a maximum tax of $14,694.00 (12.40% of $118,500); plus
- 2.90% Medicare tax on the first $200,000 of self-employment income ($250,000 of combined self-employment income on a joint return, $125,000 on a separate return), (Code Sec. 1401(a), Code Sec. 1401(b)), plus
- 3.8% (2.90% regular Medicare tax + 0.9% additional Medicare tax) on all self-employment income in excess of $200,000 ($250,000 of combined self-employment income on a joint return, $125,000 for married taxpayers filing a separate return). (Code Sec. 1401(b)(2))
RIA observation: Self-employed workers deduct half of their self-employment tax above-the-line in arriving at adjusted gross income.
There is a maximum amount of compensation subject to the OASDI tax, but no maximum for HI.
Projections for 2017 and onward. The 2017 projections were included as part of the annual report to Congress by the Board of Trustees of the Federal Old-Age and Survivors Insurance and Federal Disability Insurance Trust Fund programs (The 2016 OASDI Trustees Report). The OCA provides three kinds of forecasts for Social Security wage bases (intermediate, low cost, and high cost). The intermediate forecasts through 2025 are as follows:
- 2017 — $126,000
- 2018 — $129,900
- 2019 — $135,900
- 2020 — $142,500
- 2021 — $148,800
- 2022 — $155,100
- 2023 — $161,700
- 2024 — $168,300
- 2025 — $175,200
RIA illustration 1: Based on the OCA estimate, on a salary of $126,000 (or more), an employee and his employer each will pay $7,812.00 in Social Security tax in 2017.
RIA illustration 2: Based on the OCA estimate, a self-employed person with at least $126,000 in net self-employment earnings will pay $15,624.00 for the Social Security part of the self-employment tax in 2017.
The Social Security wage base is also projected to be $126,000 in 2017 under the low cost forecast. However, it is projected to remain at $118,500 in 2017 under the high cost forecast.
Actual annual increases to the wage base are announced in October of the preceding year and are based on then-current economic conditions. As a result, the OCA’s forecasts, especially the longer-range ones, are subject to change. Last year, the OCA correctly projected that the Social Security wage base would remain at $118,500 in 2016.
The OCA is projecting that the Social Security trust fund will become insolvent in 2034, and that the Disability Insurance (DI) trust fund will become insolvent in 2023. Carolyn Colvin, Acting Commissioner of Social Security, noted that legislation enacted last November averted the projected shortfall to the DI trust fund in 2016.
Political proposals to alter wage base. Throughout the presidential primary, the two leading Democratic candidates, Hillary Clinton (the now-presumptive nominee) and Bernie Sanders, called for reforming the Social Security wage base. Mr. Sanders wanted to eliminate the wage base altogether so that everyone pays the same percentage of their income. Ms. Clinton’s proposal was less specific but similarly called for “asking the highest-income Americans to pay more, including options to tax some of their income above the current Social Security cap, and taxing some of their income not currently taken into account by the Social Security system.”
In responding to the 2016 OASDI Trustees Report, a number of members of the House Ways and Means Subcommittee on Social Security disagreed with that approach. Subcommittee Chairman Sam Johnson (R-TX) said that while action is needed to ensure Social Security’s long-term solvency, “[w]e can’t tax our way to solvency.”
References: For FICA tax, see FTC 2d/FIN ¶ H-4545; United States Tax Reporter ¶ 31,114; TaxDesk ¶ 541,001; TG ¶ 9500.