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December 06, 2007

The Social Security tax cutoff

For the first time, the Social Security tax will be applied to annual earnings up to $100,000. Why isn't the Social Security tax applied to earnings of more than $100,000? N.C. State University economist Dr. Mike Walden has the answer. Listen

"This is a very, very common question, and it is actually fairly confusing from the point of view of Social Security. But here is the deal: Of course when they're working, people (workers) put money into the Social Security system. Then - the way the system works - when you retire, you get money out," says Walden, North Carolina Cooperative Extension economist and professor of agricultural and resource economics.

"So, money in, money out," Walden adds. "There is a limit on the amount of your earnings that are taxed when you are paying tax in. And that limit right now is $100,000. In other words, if you earned $100,000, you would pay Social Security tax on all of that.

"If you earned $150,000, you would still only pay Social Security tax only on the first $100,000. You wouldn't pay it on your other $50,000. So there is a limit there; that limit actually changes a little every year," Walden explains. "The limit's there, however, because there is a limit on the payout side. That same worker who earns $150,000 when he or she retires, however, will get paid a pension from Social Security based not on the $150,000 but on $100,000. So the two are similar, they are symmetric. You're limited on the tax you pay in, but you are limited on the pension you get when you take money out. There have been proposals - and these are proposals to make Social Security more solvent - to take away the cap on the pay-in side, but not take away the cap on the pay-out side."

Posted by Dave at December 6, 2007 08:00 AM