News & Information

 

FEATURED PRODUCT

U.S. Master™ Wage-Hour Guide, 2009 Edition
Presents a first approach to the broad and complex controls under the Fair Labor Standards Act (FLSA), Family and Medical Leave Act (FMLA), and other statutes regulating employee wages and hours.

Learn More »

CCH® PAYROLL — 10/21/09

No COLA increase for 2010 social security benefits

For the first time since 1975, when Social Security benefits became indexed to increases in the Consumer Price Index, there will be no cost-of-living increase in Social Security benefits for the coming year. The lack of increase is the result of a 2.1% decline in the Consumer Price Index (CPI) over the past year.

The Social Security Act (Act) provides for a cost-of-living adjustment, or COLA, based on changes in the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) from the third quarter of one year to the third quarter of the next year, but only if the adjustment is a positive one (Act § 215(i)). The decline in the index from the third quarter of 2008 to the third quarter of 2009 means that benefits will not rise in 2010, and, according to Social Security actuaries, benefits also are not likely to rise in 2011. In order for an increase to occur, the index must first make up for any decline in the CPI-W this past year and then rise above its level as of the third quarter of 2008. This scenario is not expected to happen until some time in 2011.

Average benefit

The average Social Security retirement benefit as of the end of September 2009 was $1,161. Any increase in the average benefit over the next year will come about only because average indexed lifetime earnings of those individuals first becoming eligible for retirement benefits may be higher. The current average benefit is only slightly higher than the average benefit of $1,153 for December 2008 that was payable in January 2009 after application of last year’s 5.8% cost-of-living adjustment.

There also will be no increase in the Part B Medicare premium for most beneficiaries this year due to a “hold harmless” provision in the Act (Act § 1839(f), 42 USC &sec;1395r) that blocks premium increases when benefits do not rise. The amount of earnings subject to taxation under FICA and SECA, the “wage base,” also will remain at the current level of $106,800 for 2010. Under Act &sec;230(a), the wage base can be increased only if there has been a benefit increase due to a cost-of-living adjustment. Absent that prohibition, the wage base would have risen to $109,200 for 2010 under the statutory formula.

The benefit and wage base increases for 2010 were announced October 15 by the Social Security Administration in a press release.

Higher taxes down the road

The amount of FICA (Federal Insurance Contribution Act) tax deducted in 2010 from paychecks next year will be no higher than the amount deducted on identical earnings in 2009. Although the tax rate for the Old-Age, Survivors and Disability Insurance (OASDI) portion of the tax under the FICA has held steady at 6.2% since 1990, the amount of wages subject to tax ordinarily increases each year based on increases in the national average wage.

Although there is no wage base increase for 2010, and there probably will not be one next year either, the next time there is a benefit increase — 2012 — will also be a year in which there will be a huge increase in the wage base — to $114,900, according to the prediction in the 2009 Annual Report of the Board of Trustees of the Federal Old-Age and Survivors Insurance and Federal Disability Insurance Trust Funds issued in May of this year. This large increase will occur because the wage base formula (Act § 230(b)) for that year will take into account the cumulative increase in national average wages during the period wage base increases were barred due to the lack of a benefit increase.

Wage base

The $106,800 earnings base for 2010 applies only to the 6.2% OASDI portion of the Social Security tax. There is no limit on the amount of earnings subject to the 1.45% Medicare (hospital insurance) portion of the tax.

The 0.0% benefit COLA and the $106,800 wage base for 2010 exactly match the published estimates in the 2009 Trust Funds report. The 2010 wage base, the same as in 2009, reflects national average wages for 2007, the variable upon which the 2009 wage base formula is based.

The 2008 national average wage index of $41,334.97 is 2.3% higher than the 2007 national average wage index and is the second lowest increase since 1993. It is also significantly lower than the average increase of 4.01% over the past 24 years. Moreover, the 2.3% increase is 27% less than the increase predicted by the Social Security trustees in their May 2009 report.

Based on the 2008 national average wage index, the formula set forth at Act &sec;230(b) indicates that wages and self-employment earnings up to $109,200 would be subject to taxation under FICA and SECA in 2010 if such an increase was allowed this year.

Tax rates

The employee/employer Social Security tax rate remains at 7.65% for 2010, including 6.2% for the OASDI portion and 1.45% for the hospital insurance portion. For the self-employed, the rate continues to be 15.3%. Note that self-employed persons calculate their net earnings as gross earnings reduced by 7.65%, and they deduct half of their Social Security taxes from their net earnings for federal income tax purposes.

Domestic employees and election workers

For 2010 the amount of wages a domestic worker can earn without being subject to FICA taxes remains at the 2009 level of $1,700. This amount has nothing to do with the absence of a COLA for 2010. Rather, it is due to the fact that increases in the threshold are based on a statutory formula that takes into account annual increases in national average wages. Although national average wages have gone up, they have not risen sufficiently to trigger a threshold increase under the statutory formula. An employer can therefore pay a domestic worker, such as a maid or nanny, up to $1,700 in 2010 without having to wrestle with federal withholding on wages.

Similarly, there is no increase in the no-tax threshold for election workers. The amount of wages they can earn before being subject to FICA remains at $1,500 for 2010.

Official notice

The Social Security Administration’s official publication of the formula adjustments, cost-of-living increases, and tax and wage bases that will affect Social Security benefit computations in 2010 and its explanations of how the adjustments are calculated will appear in the Federal Register by the end of October.

For more information on this and other topics, consult the Visit our News Library.

Visit our News Library to read more news stories.