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Social Security Taxes

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Suppose the real rate of growth of wages subject to Social Security taxes is expected to average 1% per year during the next 40 years. Assume that the Social Security tax rate remains constant, and prove that the average return on Social Security taxes paid into the Social Security trust fund will also be 1%.

Why can workers with high incomes expect negative returns on their Social Security taxes during this period?

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Solution Summary

This solution discusses the real rate of growth of wages subject to social security taxes. I provide a detailed explanation to how workers with high incomes can expect negative returns on their social security taxes if the social security tax is expected to average 1% and the growth in the social security trust fund is also 1%.

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The real rate of growth of wages subject to SS taxes is 1% per year for the next 40 years. The SS tax remains constant. The average return on social security taxes paid into SS will also be 1% because SS is a progressive tax and will either remain constant or increase. If I make $25,000 per year and increase by 1% per year, my income in the 1st year will go to 25,250. At $25,000, I am paying in at 4.2%, which means $1,050 comes out of my check. When I make $25,250, $1,060.5 will come out of my check as social security remains constant. Even though these factors are in place, the social security system has hit a shortfall. Even though the wages will increase each year for the next 40 years at 1% per year, the return on ...

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