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News Should the FICA cap be removed?

  1. Sep 22, 2010 #1

    rcgldr

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    Currently once a person's income exceeds $106,800 per year (the cap for 2009 and 2010), the FICA tax of 6.25% goes away. Essentially this is a negative tax bracket where FICA tax rate goes from 6.25% to 0.00% once incomed exceeds $106,800. If the cap was removed, then the FICA tax would remain at 6.25% regardless of income level.

    I'm wondering how much this would help with Social Security where 2037 is the predicted year SS goes bankrupt if no changes are made.
     
  2. jcsd
  3. Sep 22, 2010 #2
    I'm for raising the cap (on payments and benefits) - with one condition - eliminate the Earned Income Tax Credit.

    It's basically designed as a giveback program of Social Security taxes paid in up to about $50,000 gross. Unfortunately, many people receive checks each year that far exceed their personal contribution.
     
  4. Sep 22, 2010 #3

    russ_watters

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    I was always of the impression that the intent there was to raise/eliminate the cap without raising the benefits, in essence taxing people for future benefits they are not eligible to receive. Doesn't seem fair to me, though that's not to say taxes are necessarily intended to be fair.
     
    Last edited: Sep 22, 2010
  5. Sep 23, 2010 #4

    Vanadium 50

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    It took me under three minutes to find this out with Google. It's $125B a year in additional Social Security revenue. This is about 9% of the Social Security revenue.
     
  6. Sep 23, 2010 #5

    rcgldr

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    So how many years would this extend the year SS goes bankrupt if no other significant changes are made? Seems an additional 9% over 26 years would help quite a bit.

    > fair tax ... exceed contribution

    Most of the people that retired before the 1970's got much more than they paid in to SS, but most of those folks have since passed away. Still the basic premise in the last few decades has been the current generation is paying SS taxes to support the previous generation, and will never get back the money they paid into SS, so essentially it's been just another tax.
     
    Last edited: Sep 23, 2010
  7. Sep 23, 2010 #6
    Again, the EITC is designed to give back Social Security payments in the year collected - to the people MOST likely to need the benefits when they do retire - in other discussions this might be labeled "double dipping".
    http://www.irs.gov/individuals/article/0,,id=150513,00.html

    "2009 Tax Year
    New for tax year 2009: The amount of EITC increased for workers with a third qualifying child* and the rules changed for determining who is a qualifying child.

    Earned Income and adjusted gross income (AGI) must each be less than:

    $43,279 ($48,279 married filing jointly) with three or more qualifying children
    $40,295 ($45,295 married filing jointly) with two qualifying children
    $35,463 ($40,463 married filing jointly) with one qualifying child
    $13,440 ($18,440 married filing jointly) with no qualifying children
    Tax Year 2009 maximum credit:

    $5,657 with three or more qualifying children
    $5,028 with two qualifying children
    $3,043 with one qualifying child
    $457 with no qualifying children"


    Also, Russ is correct - the discussion of eliminating the cap on SS deductions rarely includes a discussion of raising benefits for people who paid more into the system.

    Any effort to reform the system should be fair to everyone.
     
    Last edited by a moderator: Apr 25, 2017
  8. Sep 23, 2010 #7

    loseyourname

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    I'd never heard that the EITC is a means of relieving FICA burden on low-income earners. You're still eligible for the EITC even if you're exempt from paying FICA taxes.

    As for the fairness of Social Security, frankly, I think the whole notion that it should be fair is the reason it's going to fail. SS was meant to keep elderly people who can't work out of complete destitution. It wasn't meant to be a defined contribution pension plan with payout proportional to your contribution. The first people to receive SS contributed nothing at all. It's a program that transfers income from the working to the non-working and that's it. They should not only eliminate the cap, but reduce the actual tax rate, and cap payment to retirees actually living below a certain proportion of a local poverty line. It's supposed to be a safety net, not a retirement plan.

    For those of you under 50 like me, do you really expect you're ever going to need SS? I don't care if I ever see a cent. They can completely eliminate it for all I care. But as long as it operates on the principle of income transfer and its mission is to act as a safety net for otherwise impoverished retirees, it may as well do so in a manner that actually works. The only reason it won't is every old person in the country will start grumbling about "fairness" and "I paid in so I deserve what I expected."

    Nobody gets what they expected in a recession and you were lied to in the first place. We can't transfer to everybody of a certain age where there are more receiving than there are paying. Deal with it. Deal with reality.
     
  9. Sep 23, 2010 #8
    This might help
    http://www.ehow.com/about_6519048_history-earned-income-tax-credit.html

    "Birth of the Earned Income Tax Credit
    Originally enacted in 1975, the Earned Income Tax Credit was borne out of welfare reform efforts of the early 1970s. The Tax Reduction Act of 1975 originally added the credit to the Internal Revenue Code. After expanding during the years, the credit is now one of the principal anti-poverty programs for working families in the federal budget.
    Purpose of the Earned Income Tax Credit
    The EITC was intended to offset Social Security taxes of low-income families and provide them with an increased incentive to work. Eligible taxpayers could claim refundable credits equal to 10 percent of their earned income for the taxable year, up to a predetermined dollar amount. The original EITC was enacted and available to taxpayers only for the calendar year of 1975.


    Read more: The History of the Earned Income Tax Credit | eHow.com http://www.ehow.com/about_6519048_history-earned-income-tax-credit.html#ixzz10MbmwEkl"
     
  10. Sep 23, 2010 #9

    loseyourname

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    I actually looked up the history right after I posted and saw that was the original intent.

    Seems to have deviated pretty far from that ever since. The credit rate tops off at 40% of earned income now, more than 4 times the FICA rate. If you want FICA relief, just exempt income under a certain threshold from FICA taxes. Our tax programs just make no sense sometimes (or most of the time).
     
  11. Sep 23, 2010 #10
    I've always considered Social Security taxes and Social Security benefits to be completely separate. The money I'm putting in now won't start coming back to me for nearly 50 years. Who knows what the laws regarding SS benefits will look like in 50 years? We don't know what the benefits will look like in 10, let alone 50.
     
  12. Sep 23, 2010 #11

    Astronuc

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    That's the way I see it. The government could raise the cap/ceiling without raising the corresponding benefits.

    As far as I can tell, the SS/Medicare/Medicaid system is unsustainable. Too many people people receive way more than they put in.

    At this point, I don't plan to collect SS, nor should I need to. I'd rather pass on my contributions to my children.

    SS was supposed to be insurance to assure that folks don't end up in poverty. It's become more like a gravy train for some who have generous benefits, e.g., pensions, outside of SS.

    I really don't plan on retiring, and if I did, I don't need SS.
     
  13. Sep 23, 2010 #12

    turbo

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    (Bolding mine) Not entirely accurate. FICA only applies to wages, so even if the FICA cap is removed (I still consider that a good idea) the wealthiest earners (who tend to have a lot of unearned income vs wages) would still not get hit with it. FICA is not levied against dividends, capital gains, interest earnings, etc, so it is regressive in that sense.

    SS is progressive for some, in the sense that some people gain get benefits that are greater than their FICA contributions. I hit the FICA cap every year since 1982, except one year in which I was self-employed as a programmer and was building my client base.
     
  14. Sep 23, 2010 #13

    lisab

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    I've never seen it as a "pay your money in today, get your money back in x years" kind of program. It's nothing like your 401k. Rather, it's a trans-generational payment to assure elderly won't starve (like they used to before SS).

    Today, us working stiffs pay the elderly; when we're elderly, tomorrow's working stiffs will pay us. There's a *huge* amount of trust built into the system.
     
  15. Sep 23, 2010 #14

    turbo

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    Yes. Younger people don't have much appreciation for the "safety net", since it is ingrained, but prior to the establishment of SS, older people would have to move in with their children to survive, or get shunted off to the "town farm", where they would have to continue working to raise and process food for the consumption of the residents and/or for barter or for sale to the canneries. Every fair-sized town in Maine seems to have a "Town Farm Road". Lots of people fell through the cracks then, plus no network of social services to see that people could stay in their own home, get some reduced-cost or free meals, and generally live out the ends of their lives with some dignity.
     
  16. Sep 23, 2010 #15

    lisab

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    Sounds vaguely Soylent Green-ish.
     
  17. Sep 23, 2010 #16

    turbo

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    During the depression, my father's mother's family relied heavily on a town account at the local store to get through the winters. I found this out by reviewing town reports. They had a farm and a large wood-lot, but still needed help with staples when cash was hard to come by. They would go to the store and charge mustard, molasses, rice, dry beans, flour, etc, and repay the town by cutting and stacking firewood for the school and meeting house, and by re-building winter-damaged roads in the spring, replacing culverts, etc. It wasn't charity - it was an in-kind payment system for a family with no cash on hand. They were a well-respected family that worked their way through some very hard times.

    They also paid their property taxes with in-kind services, firewood, etc.
     
  18. Sep 23, 2010 #17
  19. Sep 23, 2010 #18

    turbo

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    Not surprising, really. The medical benefits paid out cover a lot of people. You should realize that if you are getting SS benefits, you can qualify for Medicare part A (inpatient care), but if you want Medicare part B (outpatient care, doctor's exams, etc) your monthly benefits are reduced to pay the premium for that coverage. Part D coverage is a bit more complex, but still has to be paid for by the patient.
     
  20. Sep 23, 2010 #19

    russ_watters

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    The problem with that logic is that if you want to retire in 40 years, you need to start saving for it now and your interpretation of what SS is/what you will get from it is critical for properly planning. The purpose and use of SS has been consistent for some 80 years and now that that is starting to be called in to question, it leaves people like me (upper middle income, age 34) having no choice but to assume they are going to get nothing out of it.
     
  21. Sep 23, 2010 #20

    russ_watters

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    Or, *gasp*, they could have saved money for retirement on their own to ensure they wouldn't starve. What SS does is take a personal responsibility and make it a national responsibility because people are too irresponsible to save on their own despite the fact that saving on your own is a much more efficient/effective way to ensure your retirement lifestyle.
     
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