Tags: social | security | tax | income

Here's How to Keep Social Security Alive

By Barry Elias   |   Friday, 07 Sep 2012 07:04 AM

Since the inception of Social Security 75 years ago, most earned income was not subject to Social Security taxes. According to the Social Security Administration, only $3,000 per employee was taxed annually from 1937–1950 at a rate of 2 percent. However, the average annual salary in 1937 was $15,000 — in 1950 it was $25,000. By 1965, 36 percent of workers earned more than the maximum taxable income.

The aforementioned methodology did not bode well toward preserving the solvency of our social contract.

In 2009, roughly 40 percent of wages and salaries (earned income) were exempt from Social Security and Medicare taxes, according to the most recent data from the Internal Revenue Service. That year, nearly $2.5 trillion was exempt from this 15 percent tax.

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In 2012, the maximum level of income subject to Social Security and Medicare taxes will be $110,000. According to the Bureau of Economic Analysis, wages and salaries in 2012 will be nearly $7 trillion. Based on historical data, nearly 40 percent (or $2.8 trillion) will be excluded from Social Security and Medicare taxes. Including this $2.8 trillion in the taxable base could generate over $400 billion annually, helping to preserve the social contract.

Since the inception of Social Security 75 years ago, the worker-to-beneficiary ratio has fallen from 15 to 3. Preserving this social contract is becoming less feasible. If we as a society value this program, increasing the maximum taxable income seems an important part of this equation.

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