Q & A
How will increasing the taxable maximum help the Trust Funds?
Complete Question: A lot of politicians have been talking about either eliminating or increasing the maximum taxable earnings for Social Security in order to keep Social Security solvent. Increasing taxes in theory seems to make sense, but how does that really help if Social Security will just end up paying more benefits?
Answer: First, for anyone who does not know, the taxable maximum (or “tax max”) is the maximum amount of annual earnings subject to Social Security taxes. Under current law, Social Security benefit calculations are based on only the amount that was taxed and not on earnings above that amount.
You are right that many politicians are discussing the tax max and the possibility of eliminating or increasing it (in 2015, the tax max is $118,500). However, there are a lot of details of these proposals that are being left out and need to be examined. For example, some want to change the tax max but not pay any extra benefits based on the extra taxes paid. Other proposals include different formulas for calculating benefits above the current tax max amount, resulting in a lower proportional benefit payment. This is a simplified explanation, but in general, people should be aware that it is not as simple as just eliminating or increasing the tax max. That is also why these proposals include other provisions to compliment the tax provision in order to help the solvency of the trust funds.