The Social Security Administration recently announced a 3.2% cost-of-living adjustment (COLA) for benefits in 2024. While this increase is smaller than the 8.7% boost seen in 2023, it still represents a significant rise compared to recent years. This adjustment is crucial for the millions of Americans who rely on Social Security benefits for their retirement income. However, it also raises questions about the funding of these higher payments and the impact on Social Security taxes for workers.
Funding Social Security Benefits
To finance the increased benefits, Social Security will utilize its trust funds. However, it’s important to note that the majority of the funds used to pay current recipients come from payroll taxes paid by employees and self-employed business owners. The payroll tax rate for Social Security has remained constant for several years. However, higher-earning workers can expect to pay more in payroll taxes due to adjustments in the wage base limit.
How Social Security Payroll Tax Works
The Social Security payroll tax is relatively straightforward. Employees contribute 6.2% of their pay, and employers match that amount. Self-employed individuals must pay the full 12.4%. Most workers’ incomes remain stable from year to year, resulting in consistent payroll tax withholdings.
The Wage Base Limit and Its Impact
A unique aspect of Social Security payroll taxes is that the 6.2% or 12.4% rate only applies to a certain amount of earned income. Earnings above this limit are not subject to payroll tax. The wage base limit is adjusted annually based on changes in U.S. wages. In 2024, the limit has been set at $168,600, an increase of $8,400 from 2023.
Who Will Pay More?
Workers earning less than $160,200 in 2023 and 2024 will likely see no change in their Social Security payroll tax, assuming their wages remain constant. Those who receive raises will pay the standard 6.2% rate on their additional earnings. However, individuals with earnings above $168,600 in both years will experience an increase in their payroll tax bill, with an additional $520.80 in taxes due to the higher wage base limit.
For high-income, self-employed individuals, the impact is even more significant, as they could see an increase of up to $1,041.60 in their taxes. Despite these increases, it’s important to note that salaries above $160,000 are relatively rare. According to the Social Security Administration, around 10.8 million employees earn at or above the wage base limit, with an additional 660,000 self-employed workers earning above this threshold.
While the increase in Social Security benefits for 2024 is a welcome change for retirees, it does have implications for workers, particularly those with higher incomes. The adjustment in the wage base limit means that higher-earning employees and self-employed individuals will contribute more to the Social Security program through increased payroll taxes. However, for the majority of workers, the impact on their payroll taxes will be minimal, providing reassurance that their hard-earned money is being used to support a vital program that benefits millions of Americans.