Many Americans looking forward to Trump’s promise of tax cuts from his administration are going to get a rude awakening when they get their first paychecks of 2017. While Trump has vowed to cut marginal income tax rates for individuals and corporations, the social security tax levied on the nation’s top earners is set to soar in 2017 for top earners.
For the 2015 and 2016 tax years, only the first $118,500 of earnings was subject to the 6.2% social security payroll tax. That said, that “taxable minimum” is set to soar to $127,200 for the 2017 tax year, a 7.3% increase that will cost America’s top earners an additional $539 this year.
As Bloomberg points out, the steep increase in 2017 is the result of the federal government making up for lost time as the “taxable minimum” is not allowed to increase in tax years during which benefit recipients don’t get a cost-of-living increase.
A 7.3 percent hike is way above inflation: The main U.S. consumer price index was up 1.7 percent in the 12 months ended in November (the latest data available), and it rose just 0.7 percent in all of 2015. So what’s going on here? Well, the Social Security taxable minimum is adjusted annually based on an index of U.S. wages, not consumer prices. The National Average Wage Index was up 3.5 percent in 2015, five times faster than inflation.
But the real reason for this sudden, steep hike is simply that the government is making up for lost time. The 2017 hike is essentially two years of wage gains packed into one. The wage index also rose 3.6 percent in 2014, but the Social Security Administration couldn’t raise the taxable minimum last year because rules prevent an increase from happening in a year when Social Security recipients don’t get a cost-of-living increase.
Overall, the tax hike is expected to take an incremental $11.6 billion out of American pockets in 2017 according to the Social Security Administration. The 7.3% increase in the “taxable minimum” is the largest to hit taxpayers since 1983 when the maximum was still under $40k.
That said, despite the substantial 2017 increase in the taxable minimum, the overall percentage of taxable earnings subject to FICA tax has been on a steady decline since the early 80s as growing income disparity in the country has consolidated an increasing share of income in top earning households.
But, for those Millennials who suddenly feel some hope that they may actually be able to afford retirement now, please remember that, like many of America’s public pensions, Social Security is still just another ponzi scheme that, even by their own numbers, will run out of money by 2034. Nothing like “throwing good money after bad” as they say.