Why is there a cap on the amt of pay taxed for SS?

[michelyn8]

I don't have a definate opinion one way or the other about its fairness. I'm just curious why its there. Is it meant to be some sort of equalizer between high income and low income earner?

[Savoir Faire-Demogague in NJ]

If there was no cap, then by rights there should be no cap on Social Security benefits paid out when one starts to draw a monthly benefit from that system.
Currently, social security benefits are heavily skewed to the lower income ranges.

[zuzu]

I'm assuming there is a formula somewhere (?) that determines the payout. I've always wondered why lower paid workers get a higher percentage of their wages than do higher paid ones. I guess this is where the "social" part comes in.

[Deleted]

As SF noted, they calculate your SS benefits based on average indexed wages. Current formula is

(a) 90 percent of the first $749 of his/her average indexed monthly earnings, plus
(b) 32 percent of his/her average indexed monthly earnings over $749 and through $4,517, plus
(c) 15 percent of his/her average indexed monthly earnings over $4,517.

Average indexed monthly earnings, however, area capped at the SS max base, divided by 12. You can see how dramatic the drop is in the %s applied to higher brackets. There's a whole lot of income redistribution going on.

[zibazinski]

It should cap and whatever the max is you can collect on. It's way less than what the gov't takes. The max is 2400 a month and that should equal out to 70k or so but the gov't stops collecting much higher than that. You don't want to cap what is put in? Then don't cap what is paid out.

[zuzu]

Thanks Athena!

Amen to that Zibazinski!

[Deleted]

The salary cap for 2011 is $106,800. The employee pays $4,485.60 (down from $6,621.60 in 2010) and the employer contributes $6,621.60

[cronewitch]

Not only are lower income paid a higher percentage but non workers are paid entirely on no earnings. Low earners often are paid based on a spouse or something so get more than they ever earned. It is so we don't have elderly widows dying in the streets.

My grandmother collected from age 62 to 98 and seldom worked. She put in a few years in saw mills and I think 7 at Boeing as a riveter but retired at 57 when grandpa did and was a housewife a lot of years.

She probably got twice as much or more than she deserved especially after she was widowed in her early 70s.

[sil]

It should cap and whatever the max is you can collect on. It's way less than what the gov't takes. The max is 2400 a month and that should equal out to 70k or so but the gov't stops collecting much higher than that. You don't want to cap what is put in? Then don't cap what is paid out.

Read more: notmsnmoney.proboards.com/index.cgi?board=finance&action=display&thread=4066#ixzz1FHbSsrmd

Zibanski, does that mean that if you earn 70k for your top 30 (or is it 35?) earning years, you are eligible for the max ss payout?

[Deleted]

Feb 28, 2011 14:02:16 GMT -5 cronewitch said:

She probably got twice as much or more than she deserved especially after she was widowed in her early 70s.

I don't look at it that way. I think we've had this discussion before, maybe on the old Board. When SS payroll tax rates are calculated, they're based on the assumption that widow's/widower's benefits will be paid out. To put it another way, payouts could be higher given the same contribution rates if there were no payouts to widows and widowers but, as you pointed out, that would be bad public policy because it would leave people who held down the fort at home (mostly women) with nothing. So, in theory, the SS rates contemplate payouts to people who have contributed little or nothing from wage income, if they're surviving spouses of workers who contributed.

People like me balance out cases like your grandma's. DH is unlikely to ever collect widower's benefits on my record (he's 15 years older than I am), and my Ex died last year. I will never collect Widow's benefits on anyone else's record because I've made over the SS cap since around 1980, so the benefits I can get on my own record will be higher.