Understanding the Payroll Tax Rate and Cap

In order to understand how we’ve gotten to this point and if there are any solutions to fixing the daunting depletion issue, we first have to go over how Social Security is collected.

Ever heard of payroll taxes? Well, Social Security is one such type of tax, meaning it is linked to your company’s payroll. Furthermore, this means that the amount of money individuals pay into the fund is taken directly out of their wages. In other words, the money is withheld, thus going straight into the program’s reserves.

But Social Security is subject to a wage base limit. This limit, which is also adjusted yearly for inflation, is at the center of the discussion about depleting reserves. In 2020, any amount of money earned over the cap, which will be set at $137,700, will not be subject to Social Security’s payroll tax.

Of course, $137,700 is nothing to scoff at, but knowing this amount might raise some questions such as, why is there a cap in the first place? What about high income earners? Clearly there is a large amount of money that is going untaxed and if that is the case, what can be done about it? Can raising the cap help our current depletion dilemma?