By Jason Bramwell
The Social Security Administration (SSA) Office of the Chief Actuary (OCA) has projected that the Social Security wage base will increase from $113,700 for 2013 to $115,500 for 2014.
Actual annual increases to the wage base are announced in October of the preceding year and are based on then-current economic conditions. As a result, the OCA's projected forecasts, which are typically announced in May, are subject to change.
The 2014 projection was included as part of the 2013 Annual Report of the Board of Trustees of the Federal Old-Age and Survivors Insurance and Federal Disability Insurance Trust Funds. Each year, the board prepares a report to Congress on the financial outlook for both Social Security trust funds.
The SSA provides three types of forecasts for Social Security wage bases: intermediate, low cost, and high cost.
"The intermediate assumptions reflect the trustees' consensus expectation of sustained moderate economic growth and their best estimate for various other economic parameters", the report states. "The low-cost assumptions represent a more optimistic outlook and assume a faster recovery, stronger long-term economic growth, and relatively optimistic levels for other parameters. The high-cost assumptions represent a more pessimistic scenario, beginning with a small second dip to the recession, followed by weaker long-term economic growth and relatively pessimistic levels for other parameters."
For 2014, the Social Security wage base is projected at $115,500 for all three forecasts. However, identical forecast projections do not always occur. For example, in the 2013 trustees report, which includes wage base forecasts through 2022, the projected intermediate wage base in 2022 is $165,600 (see sidebar). The low-cost projection for that year is $162,900, while the high-cost projection is $167,400.
"It's not like there is this enormous range, and the OCA is hedging their bets and putting some number in the middle. They have a fairly close range", Jeff Pretsfelder, CPA, a senior tax analyst for Thomson Reuters, told AccountingWEB.
Larger Wage Base Increases Projected
While the wage base grew only 1.7 percent from 2013 to 2014, more significant annual increases are projected in the next few years.
"Under the Social Security Act, the wage is indexed over time based on changes in the national average wage index (AWI), but with a two-year lag in the index series", the OCA told AccountingWEB in a written statement. "Under the trustees' intermediate assumptions, somewhat faster wage growth is projected to occur beginning in 2014 as the economy recovers. The trustees assume the increase in the AWI from 2011 to 2012 will be 1.7 percent. That increase is used to produce the modest projected wage base increase from $113,700 for 2013 to $115,500 for 2014. However, later in the decade, the assumed increase in the AWI from 2015 to 2016 is projected to be 5.5 percent. That larger wage increase results in the correspondingly larger increase in the wage base from $130,500 in 2017 to $137,700 in 2018."
In seven of the past eight years, the intermediate Social Security wage base projections by the OCA have been higher than the actual wage base for a given year. From 2009 to 2011, the actual wage base remained constant at $106,800. Last year, the OCA correctly projected in its 2012 annual report that the wage base would increase to $113,700 in 2013.
"The OCA does longer-range projections once a year, and then later it does the actual numbers for the next year so payroll departments can start reprogramming their computers to put the new numbers in", said Pretsfelder, who is also an attorney.
According to data from Thomson Reuters, the following are the wage base projections and the actual wage bases from 2006 to 2013.
- 2006: $95,700 (projected); $94,200 (actual)
- 2007: $99,600 (projected); $97,500 (actual)
- 2008: $103,800 (projected); $102,000 (actual)
- 2009: $108,300 (projected); $106,800 (actual)
- 2010: $113,100 (projected); $106,800 (actual)
- 2011: $117,900 (projected); $106,800 (actual)
- 2012: $122,700 (projected); $110,100 (actual)
- 2013: $113,700 (projected); $113,700 (actual)
Pretsfelder said he is keeping his accountant and lawyer clients informed about the projections, but he cautions his clients that the forecasted numbers and the actual numbers will likely change dramatically.
"The OCA comes out with these projections in May, and by October, they've already changed by thousands of dollars", he added.
FICA Tax Rates
The Federal Insurance Contributions Act (FICA) imposes two taxes on employers, employees, and self-employed workers: Old-Age, Survivors, and Disability Insurance (OASDI), commonly known as the Social Security tax, and Hospital Insurance (HI), commonly known as the Medicare tax.
According to Internal Revenue Code Section 3101(b)(2), the FICA tax rate for employees and employers is 7.65 percent each – 6.2 percent for OASDI up to the wage base and 1.45 percent for HI (no maximum). Also, there is a 0.9 percent additional Medicare tax that applies to all wages in excess of $200,000 – $250,000 for joint returns and $125,000 for married taxpayers filing separate returns.
Based on an OCA estimate, on a salary of $115,500 or more, an employee and his or her employer each will pay $8,835.75 in Social Security tax in 2014, according to an analysis by Thomson Reuters.
For self-employed workers, the FICA tax is 15.3 percent – 12.4 percent for OASDI and 2.9 percent for HI, according to Internal Revenue Code Section 1401(b)(2). The 0.9 percent additional Medicare tax similarly applies to self-employment income in excess of $200,000 – $250,000 of combined self-employment income on a joint return and $125,000 for married taxpayers filing a separate return. In effect, this makes the Medicare tax rate 3.8 percent for self-employment income in excess of these amounts.
According to the Thomson Reuters analysis, self-employed workers deduct half of their self-employment tax above the line in arriving at adjusted gross income. Based on the OCA estimate, a self-employed person with at least $115,500 in net self-employment earnings will pay $17,671.50 for the Social Security part of the self-employment tax in 2014.
The trustees of the federal Old-Age and Survivors Insurance and Disability Insurance trust funds project that the dollar level of the combined trust fund reserves will decline beginning in 2021 until reserves are depleted in 2033, according to the 2013 trustees report. The Disability Insurance Trust Fund reserves become depleted in 2016, and the Old-Age and Survivors Insurance Trust Fund reserves become depleted in 2035.