How many people are affected?
About 12 million will pay more because of the higher minimum this year, the SSA estimates, out of 173 million workers paying into Social Security. In any given year, about 6 percent of all workers make more than the taxable minimum, a number that’s been consistent for decades. The SSA estimates that almost 20 percent of workers reach the taxable minimum at some point in their careers, even if it’s only for one year.
Why does the taxable minimum exist?
The U.S. income tax was envisioned as a progressive tax, with the wealthiest supposedly bearing the largest tax burden and the lowest-income Americans paying nothing or even receiving tax credits. The Social Security payroll tax is unusual in that lower-income Americans end up paying a greater share of their income than the rich.
The main idea is that the Social Security taxes you pay should more or less correspond with the benefits you eventually receive. The benefit formula is progressive, however, with lower- and middle-income workers getting bigger Social Security checks relative to what they put in than the wealthy. No matter how much you contribute, the most you can get from Social Security this year is $2,687 per month.
Doesn’t Social Security need money?
In the course of the 2016 election campaign, an increasing number of Democratic politicians and policy experts floated the idea of raising more revenue for Social Security. The idea was to use the money to expand benefits and patch the program’s long-term funding shortfall. Those ideas are largely dead under a Republican-controlled White House and Congress.
One argument for raising the taxable minimum is that the Social Security payroll tax hasn’t kept up with massive, ever-widening income inequality in America. While the share of citizens who exceed the taxable minimum has held steady, the share of the nation’s income subject to the Social Security payroll tax has been slipping, from 90 percent in the early 1980s to less than 83 percent. That’s because workers at the very top are earning so much more than they used to, and the vast majority of their wages avoid Social Security payroll taxes.
Does the rate hike mean my benefits will rise, too?
Barely. While the taxable minimum is based on an index of U.S. wages, Social Security benefits are based on prices. Given low inflation, they’re inching up just 0.3 percent. That 2017 cost-of-living adjustment means the average retired worker gets an extra $5 a month, bringing the average retiree's monthly Social Security check to $1,360.
Any other nasty surprises coming in 2017?
If you try to max out your retirement accounts every year, you may be disappointed to learn that the amounts you can contribute to an individual retirement account or a 401(k)-style retirement plan are holding steady. In 2017, there’s still an annual limit of $18,000 for contributions to a 401(k) and $5,500 for an IRA. Workers 50 and older can save an extra $6,000 in a 401(k) and $1,000 in an IRA, so-called catch-up contributions that are also the same as last year.
One change in 2017 that could be very costly to some Americans relates to tax refunds. A new law requires the Internal Revenue Service to hold onto refunds for people claiming the earned income or additional child tax credits until mid-February. The IRS also warned that new safeguards against fraud and identity theft could delay refunds further.
A delayed refund isn’t technically a tax increase. But it might feel like one for millions of low-income Americans who typically rely on refunds to pay back debt and cover basic expenses at the beginning of the year.
--With assistance from Jordan Yadoo in Washington.