Andrew G. Biggs has some problems with Democratic presidential candidate Barack Obama’s proposed changes to the Social Security payroll tax.
Biggs, a former principal deputy commissioner at the Social Security Administration, is a resident fellow at the American Enterprise Institute, a conservative think tank. In a recent Wall Street Journal opinion piece, he elaborates on why he thinks Obama’s Social Security tax changes won’t work.
So what Obama proposal prompted Biggs’ disagreement? Elimination of
the cap on the amount of earnings subject to the Social Security
payroll tax.
Obama broached this subject last fall and wrote about it in a Quad-Cities Times (Davenport, Iowa) article, saying in part:
"If we kept the payroll tax rate exactly the same but applied it to all earnings and not just the first $97,500, we could virtually eliminate the entire Social Security shortfall."
More on the Obama proposal can be found at On The Issues and at the Senator’s campaign Web page on the topic.
Biggs, however, says Obama’s plan has two problems: "His proposal would be a very large tax hike, yet it won’t be enough."
Plus, writes Biggs, "Mr. Obama’s modest improvements to Social Security’s financing come at a steep cost. The top marginal federal tax rates would effectively increase to 50.3% from 37.9%, equivalent to repealing the Bush income tax cuts almost three times over."
It’s easy to dismiss the positions of Obama and Biggs as the usual liberal vs. conservative tax controversy. But each makes some good points and, surprising even myself, I find one instance where I fully agree with Biggs.
When it comes to ensuring the long-term viability of our federal retirement benefits system, he writes, "All options should be on the table."
What’s up with that big bag? The above illustration of a happy taxpayer carrying off his giant sack of Social Security money is courtesy of the Social Security Administration.
Yep, that explains the inordinately large bag representing federal retirement benefits.
Most of us don’t share that rosy vision of future Social Security payments. We know we need to take
charge of our retirement planning and put away as much as possible ourselves,
in part through workplace plans or IRAs. Remember, you’ve still got time
— up until
Roth or traditional IRA account.
I’ll blog more on IRAs another time. For today, though, the tax tip takes its cue from the Social Security payroll tax issue.
Recovering excess FICA taxes: Most workers are very aware of that FICA line on their pay stubs. The acronym stands for Federal Insurance Contributions Act and consists of payments to the Social Security retirement system and Medicare.
The Social Security payroll tax rate is
Those rates are levied not only on workers, but also their employers, who match the employee contributions to help build up your eventual benefits from these programs. Self-employed workers have to cover both the employee and employer portions, but get an above-the-line deduction for half the
Higher paid workers, however, escape part of the FICA assessment. For 2007, only the first $97,500 in earnings was subject to the
Medicare note: There is no earnings limit on the
1.45 percent collected for the federal medical insurance program. Workers who made more than the Social Security cap still have to pay the Medicare portion.
For 2008, the Social Security earnings cap was bumped up $4,500 to $102,000. The wage base hike matches the one granted in 2002 as the largest
in dollars and cents ever. It translates into a maximum $6,324 in Social Security payroll taxes from your paycheck, or $279 more than last year.
If you’re a valuable enough employee to make more than the Social Security cap, good for you for getting a break on this payroll tax. If you’re with the same employer all year, once you hit the cap, the collections quit coming out of your paycheck.
But what if you changed jobs and your combined income from both workplaces exceeded $97,500 last year? You might have overpaid your $6,045 maximum in Social Security taxes.
How? Because your new employer had no way of knowing what you already paid in Social Security tax. Your new payroll office just started collecting on the income at your new job.
Don’t panic, though. There’s a way to get that excess Social Security tax back.
Line 67 of Form 1040 allows you to report your overpayment and have it counted as part of your overall tax payments. This is in the same form section where you enter your withholding. All of your tax payments then are used to cover what tax you might owe or, if your payments are more than your IRS bill, give you a refund.
If you file a Form 1040A instead, you can account for excess Social Security tax payments on line 42. I know, it doesn’t specifically say so on the form. But check out page 51 of the 1040A instructions.
