Why the 3.6% 2012 COLA Increase Will Result in a Tax Hike For Over 10 Million American Workers

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With the announcement of a 3.6% COLA (cost-of-living-adjustment) increase, many social security recipients were cheering. After two years without a COLA increase for their benefits, this much needed boost was a ray of sunshine to over 60 million retirees. However, the picture is not so great for the 160 million workers in America who are subject to Social Security and Medicare payroll taxes.

Because of the COLA increase, the maximum taxable earnings (wage base) subject to social security also increased from $106,800 to $110,100, or a 3% rise This will adversely affect about 10 million higher income workers who currently earn more than the 2011 wage base of $106,800. The actual social security OASDI tax (6.20%) and Medicare tax rate (1.45%), deducted from most worker paychecks, will remain at 7.65% in total. Employers pay the same amount of payroll taxes as their workers. Though, the OASDI tax for employees is currently 2% lower, thanks to payroll tax cuts stimulus legislation. Self-employed individuals pay twice the payroll tax rate, or 15.30%, since they do not have an employer match component.

Higher taxes? Currently a worker earning over $106,800, will pay a maximum of $8,170 (or $6,034 with tax breaks) per year towards social security and Medicare payroll taxes. So, for someone earning $120,000 a year, their 2011 social security/Medicare payroll taxes will be about $8,170. In 2012, this will rise to $8,423 or an increase of $245 (3.1%). Which ironically is pretty close to the $250 SSI payment sent to most retirees as part President Obama’s 2009 stimulus package. As a double whammy, the 2012 rise in social security taxes would actually be equivalent to a 35% increase ($8,423 vs $6,221) if the payroll tax breaks on OASDI income are not extended.

You can see more of the 2012 Social security changes in this article, and I encourage you to subscribe via Email or RSS to get the latest news on next years social security and tax rate changes.

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{ 7 comments… read them below or add one }

Jim Chapman September 16, 2012 at 8:15 pm

Go Recovery!!!
Look at us! If it gets any brighter we won’t know what to do. Thank God the inflation rate is so low! Oh oh, gas companies must not know the rate inflation is near zero. And the grocery stores and the electric company and………

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thomas February 12, 2012 at 4:35 pm

It would be nice to see an increase in my Social Security check each month. Last year, because of Medicare increases my net Soc Sec. check dropped from $813 to $801/month. The previous two years I also lost a chunk of money from my checks. I’m not the only one this happened to. I know several people who lost ground with the checks the receive. Some of them lost they’re apartments & homes because of it.

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Michel Baltay December 7, 2011 at 10:27 pm

deduction in California of the state income tax, property tax and mortgage payment if I do not itemize on Form-A

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Fred November 8, 2011 at 8:49 am

I haven’t seen a COLA increase (or any raise or bonus) at my job in 3 years, my company already announced no raises or bonuses in 2012. Frankly I’ll just be happy to still have the job in 2012.

Wonderful that these retirees are getting more money, too bad it’s my SS and tax payments that fund it.

Assuming eligibility remains at 67 (which seems doubtful), by the time I’m eligible to collect–35 years–I’ll be lucky if they can pay me pennies on the dollar for what should be due to me.

I’m also staring down the barrel of a 401K that has lost 2% this year despite the funds being sold as conservative risk–BTW, my employer halted any matching 401K contributions 2 years ago, so don’t have that going for me either!

My real estate taxes actually increased this year as well despite a falling home values, as did my cost for health insurance, dental insurance, home owners insurance and life insurance. Home heating oil went from $2.80/G for last season to $3.80/G for this season–a 35% increase.

The only thing that went down this year was my auto insurance, but that’s probably because I’m still driving my old car which is now 12 years old car with 172K miles.

I’m trying to muster my inner George Bailey, but it’s getting harder and harder……

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Donald October 20, 2011 at 8:21 pm

I wish I were making $110,000 so that I could get really angry about this.

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MikeG September 17, 2012 at 10:18 am

Just what I was thinking! Who makes $100k these days?

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Peter October 19, 2011 at 11:46 am

The COLA increase is hardly a big deal for retirees as most of the increase in January will be lost to higher Medicare premiums, which are deducted from Social Security payments. So ALL Americans will lose.

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