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The Social Security Wage Base For 2007

By JLP | December 5, 2006

The Social Security Wage Ceiling for 2007

Social Security Wage Bases Rises to $97,500 Beginning in 2007, the maximum amount of an employee’s earnings that an employee must pay the Social Security tax on will be $97,500. This represents an increase of $3,300 (or a 3.5% increase) over the 2006 wage base.

The FICA tax rate remains at 7.65% for 2007. The FICA tax rate is composed of two separate payroll taxes, the Social Security tax of 6.2% and the Medicare tax of 1.45%. The maximum Social Security tax employees and employers will each pay in 2007 is $6,045 ($97,500 x 6.2%). This is an increase of $204.60 from the 2006 maximum of $5,840.40. As in prior years, there is no limit to the wages subject to the Medicare tax; therefore, all covered wages are still subject to the Medicare tax rate of 1.45%.

It just keeps going up. Oh how I wish I could take that $6,045 and invest it on my own!

For more on Social Security, check out this piece over on Russell’s blog.

Topics: Financial Planning | 19 Comments »


19 Responses to “The Social Security Wage Base For 2007”

  1. Bryan C. Fleming Says:
    December 5th, 2006 at 1:20 pm

    Great. So basically we’re paying $12,000 a year for something that won’t be around when most of us retire.

    Consider, what kind of retirement any of us would have if we invested that same $12,000 into any kind of Mutual fund or stock throughout our working careers.

    Good post, thanks for letting us know about it.

    – Bryan
    http://www.BryanCFleming.com

  2. eR0CK Says:
    December 5th, 2006 at 1:52 pm

    More the reason to eradicate SS for our generation!

    Nah, instead congress will spend time making on-line gambling illegal ::rolls eyes::

  3. dimes Says:
    December 5th, 2006 at 3:19 pm

    They ought to get rid of the cap altogether if social security is truly underfunded.
    Wouldn’t it be nice if you were exempt from payroll tax until you’d earned at least $10K? Or if they put the first $620 of your tax into a private account? At least then everyone would get something.

  4. JLP Says:
    December 5th, 2006 at 3:27 pm

    dimes,

    I disagree. They need to reign in the costs of Social Security. It was MEANT to be a safety-net but congress started giving away too many benefits and things have gotten way out of hand.

    I would LOVE it if they would reduce the tax to say 1% and turn Social Security into a sort of “medicaid for retirement” and give benefits to only those who need it.

  5. sam Says:
    December 5th, 2006 at 5:00 pm

    JLP and Dimes,
    The problem of reforming SS depends on how you see the program; as a retirement system, or as welfare. Up to now, it has been a retirement system loosely based on contributions, the more you put in the more your get back out. And everyone is treated pretty much the same.

    Some of the ideas to reform include things like lifting the maximum to get more money from rich(er) people, who would contribute more from their higher salaries but not get any more back out. Other ideas include means-testing SS payments, so if you had saved up a bunch of money in a 401k or IRA, the gov’t might take your SS and give it to someone that didn’t fund their 401k.

    These ideas turn SS into more of a welfare system, and less of a retirement system. My opinion is that moving SS to more of a welfare system is a mistake because as more and more people see that their contributions won’t be returned, then political support for SS will decline. It would create more of an “us vs. them” climate, rather than a “we’re all in this together” climate.

    I think that SS is necessary because there is a certain segment of the population that will not save for retirement, and a segment of the population that will have their savings decimated by illness or some other calamity. Maybe you could just say “too bad, you made your bed, now sleep in it”, but I don’t think that Americans will stand for a large group of people pushing their belongings around in shopping carts. And I don’t think that private charity should have to take on the problem by itself.

  6. JLP Says:
    December 5th, 2006 at 5:16 pm

    Sam,

    I don’t see any way around this becoming an “us vs. them” scenario. There’s simply no way for the younger generations to support the Boomers unless they raise the taxes significantly. That’s the problem with the pay-as-you-go system that we have in place. It works great when you have a large number of people paying in a small number taking out. It’s not so fun when it is the other way around.

    The sad fact is that a lot of people simply failed to take responsibility for themselves. Sure, some had no choice in the matter. However a lot of them spent their money on cars, boats, and big houses instead of putting it in their retirement plan. They will be the ones griping the loudest if and when cuts need to be made.

  7. dimes Says:
    December 5th, 2006 at 5:40 pm

    Sam,
    I hate the idea of means testing SS, mainly because then again it becomes a Katrina issue of “you’re too dumb/lazy/shortsighted to take care of yourself, so the guvrmnt will bail you out again” and is a big FU to those people who did bother to plan and save and make sacrifices all along the way. Why do people have to be punished time and time again for responsibility? (Course I guess the same could be said for the cap on contributions.)

    JLP: It would be wonderful to reign in SS costs, but it’s simply not gonna happen. I’d love it if they raised the retirement age to 70+ for everyone as well and made SS payments low enough that you have to save to survive, but I don’t imagine that happening. My husband thinks it should be immediately abolished.
    And all that ignores the bigger problem that SS revenues are NOT kept separate from other government revenues. All that jazz Algore spouted back in 2000 about an ironclad lockbox was just hot air. The SS revenues are wasted on other pork projects and aren’t held in reserve for SS. It’s an effective 6.2% regressive nonrefundable income tax.

  8. jr Says:
    December 5th, 2006 at 9:16 pm

    Not to be an Al Gore defender, but if you remember the actual TV debates it was something like this:

    Gore said his plan would put SS and interest in a lock box, reinvesting the interest. He also talked about a plan to allow younger workers to invest savings (akin to 401k).

    Bush talked about allowing younger workers to divert SS money into private savings accounts (basically the same system that was floated in 2005).

    Of course, Gore didn’t become president so the lock box never got a chance. And even if he had and actually created the lock box, the key would still be available for future congresses and presidents.

    I personally think SS is a somewhat inefficient system. But I’m glad that a minimal safety net exists; I’ve seen both what a devastating effect one serious health problem can have on family and also what one dishonest FA can do to finances. Add in death, divorce, etc…

    Like Sam says, we don’t want a disincentive to save, so it would be best for everyone to get as equal an amount possible out of the system. But it’s a social system, and as such, inherently inefficient.

  9. Russell Bailyn Says:
    December 5th, 2006 at 11:52 pm

    I posted about social security twice recently, advocating more awareness for younger people (those who will be most affected by the problem). I had a major realization after speaking with a fairly broad demographic. Some people actually are not opposed to having higher taxes float the social security system. Better yet, some people don’t mind paying higher taxes at all- they view it is an important and morally justified activity. I’m an advocate of private accounts but understand the learning curve for many people would be huge.

  10. JLP Says:
    December 5th, 2006 at 11:57 pm

    Russell,

    Although I like private accounts, I don’t see how they can solve the problem that we have now since one generation is basically funding another generation’s retirement. It seems to me if SS is in trouble, diverting money from the program into private accounts would only make it worse. Besides, most younger workers have 401(k)s and IRAs.

    I just want to opt out of the system.

  11. Foobarista Says:
    December 6th, 2006 at 3:13 am

    I’m enough of a libertarian that I’m unimpressed by the “solidarity” arguments used to argue for high SS taxes; after all, Bill Gates and Warren Buffett need to get SS because we need them to feel “solidarity”. (Odd that “solidarity” arguments aren’t used against progressive taxation – it’s the same argument.) But I’m enough not a libertarian to realize that we need a ground-floor safety net for genuinely poor seniors. Frankly, I’m a fan of means-testing, even if it means I probably wouldn’t get SS. And SS is already partially means-tested since it’s taxed.

    As far as I’m concerned, SS is just a tax, and one that puts my wife’s self-employment income into a marginal tax rate of over 50%, once all taxes are included.

  12. sam Says:
    December 6th, 2006 at 2:35 pm

    My prescription for “saving” or at least improving the condition is to scale back the cost of living increases each year to something less than the full CPI – maybe CPI less 1/2 or 1 percent. That way everyone in the system shares the pain, and it isn’t just pushed off onto the younger people. Of course AARP would scream bloody murder and start running stories about old folks eating dog food. But to me it is the simplest and fairest way to fix the system.

  13. Rob Says:
    December 6th, 2006 at 6:40 pm

    “My opinion is that moving SS to more of a welfare system is a mistake because as more and more people see that their contributions won’t be returned, then political support for SS will decline.”

    FDR is on record as saying that this is one of the main reasons he set it up the way he did. He didn’t want his legacy eroded by people realizing what a horrible deal he got us into and dumping this system. When social security was set up most people didn’t even live to 65 and it was really just an insurance policy for the unlikely event that you actually outlived your ability to work. Now people think of it as some kind of retirement savings vehicle where they feel entitled to live 15, 20 years on the backs of the working people. It’s truly rediculous that young working people who could actually use the money or get much greater benefit out of it by saving are instead paying taxes so that Bill Gates can get social security checks before he dies. And since retired people have lots of time on their hands to vote and are too greedy to give up the monthly payments they feel they earned by paying into the system when they did work, it’s not likely that the system will be fixed any time soon.

  14. Rob Says:
    December 6th, 2006 at 6:43 pm

    Not to mention the disproportionately negative effects the system has on underprivileged minorities who typically have shorter life spans and have a much lower chance of getting a return on their payments. And you can’t inherit social security rights, so instead of having actual ownership in a 401(k) type account that can be passed on to future generations to aleviate the povert cycle, the value just disappears for them. In this sense it’s a hugely regressive tax.

  15. Angela Says:
    December 7th, 2006 at 7:53 am

    Wow, this is illuminating. Over here we have a similar system to Social Security called National Insurance (NI) – similar enough that there is a reciprocal treaty.

    Everyone gets something, how much else you get depends on how many years you contribute and above a certain threshold it doesn’t matter how much you contribute in a year, doesn’t alter the amount you get back.

    And if you want to you can pay lower NI payments (and get less back from the government on retirement), you must then invest those contributions into a private pension (like a 401(k) or IRA except you cannot touch it till you’re 55). Good thing about this system is that even if you mess up you still get something.

    I’ve never heard anyone suggest that we should do away with it over here. But we are proud of the existence of our welfare state – so this discussion is very interesting.

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  18. Bruce Says:
    March 14th, 2008 at 4:33 pm

    The real problem is letting the government control our retirement savings. No matter what they promise, Congress can vote to change it after the money is rolling in. A temporary tax becomes a permanent one. Your social security “savings” becomes welfare, etc. Make sure to tell your Congresspeople thanks!

  19. CLEANCUT Says:
    October 20th, 2008 at 5:26 am

    SINCE THE TIME OF FDR CONGRESS HAS STUCK THERE HAND IN THE SS POT TO THE TUNE OF 3 TRILLOIN DOLLARS..IF IT HAD BEEN SET UP AS UNTOUCHABLE WE ALL COULD HAVE RETIRED AT 60 WITH FULL BENIFITS AND MEDICAL. BUT WHY SHOULD CONGRESS WORRY THEY TOOK CARE OF THEMSELVES AND SPENT OURS.

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