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.