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Is the government using in action indexing sleight-of-hand to increase wage taxes while leaving retiree benefits at?

Is dirty in action indexing being done by the Social Security Administration?

Background

On October 18, 2016 the Social Security Administration (SSA) announced that recipients will get a 0.3% cost- of-living adjustment (COLA) for 2017. The COLA was zero for 2016.

At the same time the SSA also announced that the wage base on which Social Security taxes will be levied will increase from $118,500 in 2016 to $127,200 in 2017, a 7.3% jump. This increase was actually the total for the two years ending 9/30/2015 and 9/30/2016. No increase was imposed in 2016 because an increase to the Social Security wage base is not allowed in a year when there is no cost-of-living increase in benefits. A miniscule benefit COLA for 2017 triggered a 7.3% increase in the wage base. Having any COLA is enough to allow a change in the wage base to occur.

Use of the CPI as an index for benefits has been criticized because the CPI does not re ect the products and services that seniors buy, which are skewed towards healthcare.

Analysis

A 3.5% annual difference between changes to benefits and taxes is huge if repeated over time. Is this the government’s way of increasing payroll tax revenue but limiting benefits? The answer is no.

There are three things being indexed.

An individual’s top 35 years of covered wages (wages up to the FICA limit) are indexed using the change
in average wages in computing the Social Security benefit at retirement. This is not designed as in action protection. At retirement that index no longer applies, and future benefits are adjusted up by the CPI-W COLA. This is supposed to provide in ation protection.

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Having growth in average wages exceeding CPI-W is nothing new. (The data series for average wages starts in 1990.)

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This table makes the future come more into focus. Entitlement nation needs to make all the earned income subject to Social Security taxes, and by using an index that increases taxes faster than the consumer price index helps.

The good news for retirees is:

  • In general, they don’t pay employment taxes, or are well below the FICA limit, and
  • The CPI-W is not used in computing their benefit at full retirement age.

Conclusions

The indexing of benefits and the Social Security wage base is not designed to raise revenue while limiting benefits.

The greater risks to participants are:

  • The solvency of the country (The Social Security Trust Fund owns only US Government debt),
  • Whether earnings on the assets of the Social Security trust fund will keep up with increases in benefits
  • Whether future benefits will be means tested.