What this means is that for those who are fortunate enough to make more than the cap, take-home pay is higher at the end of the year than at the beginning, but you spend most of the year living on a monthly budget that is after the social security tax is paid.
Benefits are calculated based on the amount of earnings that are subject to taxation, but not on earnings that exceed the taxable threshhold. In addition, and this is what makes it SOCIAL insurance, the benefit formula is calculated to replace a higher percentage of low dollar earnings than of high dollar earnings. Thus, although people with incomes that are consistently at or near the cap get a higher benefit than people with lower earnings (and sometimes a much higher benefit), they are to some extent subsidizing the benefits of people who have been employed, but at lower wages.
One of the problems of the Social Security system, aside from the approaching retirement of the baby boom generation, is that while incomes have increased, the increase has been disproportionately among those who are making more than the cap, and none of that income is subject to taxation. On the other hand, the incomes of lower paid workers, which are 100% subject to Social Security taxation, have stagnated relative to those of the highest income workers.
Virtually all experts agree that simply removing the cap on the amount of earned income subject to Social Security taxes would make the program solvent as far into the future as the eye can see. The reason this would happen is that, even if benefits were calculated on the entire amount of income subject to the tax (as I think they should be in order to preserve the integrity of the program as something distinct from welfare), the increase in revenues from this would be, due to the progressive nature of the benefit formula, much greater than the increase in benefits that would be payable to these higher income people.
In contrast to Biden and Obama recognizing that this is by far the simplest, and I think fairest, way to bring the Social Security system into actuarial balance, the responses of the other leading candidates were disappointing to say the least.
Hillary Clinton, as she has done with so much, basically said, "I'm not going to tell you what I'd do about this problem as President. Just trust me." I don't know about anybody else, but this refrain is getting VERY tiresome to me. She may think that answering virtually every question this way is the best way to preserve her alleged "inevitability," but it's extremely irritating to me. I don't trust ANY politician that much, and I damned sure don't trust her that much.
Bill Richardson's answer wasn't all that clear, but it basically seemed to be that we can somehow miraculously make the problem go away without either reducting benefits or increasing taxes, and I simply don't think that's remotely possible.
Dennis Kucinich (either in this answer or another one) actually proposed REDUCING the Social Security retirement age, supposedly because "people's bodies break down," apparently not acknowledgint that the reason the Social Security Disability Insurance program exists is precisely to take care of people who become unable to work before retirement age, and simply ignoring the fact that this would very significantly worsen the solvency problem.
Dodd said he would probably go along with raising the cap, but not eliminating it altogether. What the advantage of this would be, other than to protect investment bankers and the CEO's of big corporations while taxing people such as successful professionals on all of THEIR incomes frankly escapes me.
John Edwards' response, however, although it might at first blush seem attractive, betrayed a serious lack of understanding of how the Social Security program works, and was therefore basically nonsensical. He first said that he would advocate exempting incomes of, say, from $97,000 up to $500,000 and then imposing it on incomes above $500,000. He explained this by saying that there were a lot of, for example, "firefighter couples" who might make more than $97,000 a year between them.
What he doesn't seem to realize, however, is that the Social Security tax isn't determined based on the combined income of a married couple, it's based on the EARNINGS FROM EMPLOYMENT of EACH INDIVIDUAL PERSON. I don't think there are too many firefighters who are making more than $97,000 per year, so removing the cap would have no impact at all on this hypothetical couple.
Secondly, having this "doughnut hole" of income not subject to taxation, and then subjecting income above it to taxation again, would be an administrative nightmare in a system that is based on payroll taxes, especially where someone changed employers in mid-year. It would not only increase the complexity of collecting the tax, it would take some kind of an entirely new calculation of the benefit formula that I can't even imagine, and that he gives no evidence of even having thought about. On the other hand, an incidental benefit of subjecting ALL earnings from employment to the tax would be to reduce the administrative hassles of refunding taxes that were collected from a second employer where someon changes jobs in mid-year and makes less than $97,000 from each employer, but more than $97,000 total, and it would also be easily accomodated within the present overall structure of tax collection and benefit calculation.
My biggest concern with Edwards' answer, though, is that it seems to be part of a pattern where he says whatever he thinks people want to hear, while all the while saying that "we need to be honest with the voters." In 2004, when he was trying to run to the right of most of the Democratic field on most issues, he said universal health insurance was too expensive and impractical, but now when he's trying to run to the left of most of the field, he claims to be its biggest proponent. In 2002, he co-sponsored the Iraq War authorization resolution when going to war against Iraq was popular, but now tries to be the leading opponent of the war when the war has become unpopular. And now, he comes up with specious reasons for opposing eliminating the cap on Social Security taxation (the non-existent "firefighter couple") to avoid saying that he would raise the taxes on anybody other than the most extremely wealthy (who aren't likely to vote for any Democrat anyway).
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