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CCH® PAYROLL — 10/23/07

Modest social security increase still larger than expected

Social Security beneficiaries will see a modest 2.3% increase in their monthly checks in 2008 as a result of inflation. The 2.3% cost-of-living adjustment, or COLA, will produce an estimated average monthly benefit of $1,079 for all retired workers in 2008, $35 a month more than in 2007. However, $2.90, or 8.3%, of that increase will be eaten up by a rise in the standard premium paid by beneficiaries enrolled in Medicare Part B in 2008. The COLA increase will be applied to this coming year's benefits, beginning with benefits for December 2007, which are first payable in January 2008.

The amount of earnings subject to taxation under FICA and SECA, the “wage base,” is also going up in 2008. The 2008 wage base of $102,000 is $4,500 higher than the 2007 amount, and the maximum additional Social Security tax that might be collected on someone earning above the 2007 wage base is $279. In terms of dollars and cents, this is the largest increase ever and matches the increase for 2002. However, as a percentage, the 4.6% increase is only slightly higher than the average increase of 4.1% during the 19 years that the 6.2% Social Security tax rate has been in effect.

Tax increase reflects increase in national average wages

The tax increase will show up in the FICA tax deducted from the paychecks of those earning above the 2007 wage base of $97,500. 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 increases each year based on increases in the national average wage.

The $102,000 earnings base for 2008, which applies only to the 6.2% OASDI portion of the Social Security tax, could result in a FICA tax increase of as much as $279 for employees (and their employers) whose earnings exceed the 2007 tax and earnings base of $97,500. Self-employed individuals may owe as much as $558 in additional self-employment (SECA) tax in 2008 since they must also pay the “employer” portion of the taxes. However, they can recoup some of this amount through a deduction on their federal income tax return. There is no limit on the amount of earnings subject to the 1.45% Medicare (hospital insurance) portion of the tax. These tax increases represent a 4.6% increase over the maximum amounts of the OASDI portion of the FICA tax owed in 2007. This is higher than last year's 3.5% increase, but still close to the average 4.1% increase.

About 12 million workers out of approximately 164 million workers who will pay Social Security taxes in 2008 are affected by the higher wage base for 2008, according to the SSA.

Increase was less than expected

The $102,000 wage base for 2008 is $300 less than the estimated increase published in the 2007 Annual Report of the Board of Trustees of the Federal OASDI Trust Funds issued in April of this year. The 2008 wage base reflects national average wages for 2006, the variable upon which the 2008 wage base formula is based. The 2006 national average wage index of $38,651.41 is 4.6% percent higher than the 2005 national average wage index, and is the second highest increase since 2000; however, the increase in national average wages is just slightly higher than the average increase of 4.1% over the past 22 years. The 4.6% increase is relatively close to the 4.8% increase predicted by the Social Security trustees in their April report.

The lower wage base will mean that Social Security will take in less revenue next year than expected, but it also means that obligations to future retirees will be lower as well.

No change in tax rates

The employee/employer Social Security tax rate remains at 7.65% for 2008, 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 employee and election worker coverage

For 2008 there is a $100 increase in the amount of wages a domestic worker can earn without being subject to FICA taxes. An employer can pay a domestic worker, such as a maid or nanny, up to $1,600 in 2008 without having to wrestle with federal withholding on wages. The threshold for election workers also increases in 2008, to $1,400.

Medicare premiums

The Department of Health and Human Services has announced that for 2008, the standard Medicare Part B premium will be $96.40, an increase of 3.1% or $2.90 over the amount payable in 2007. A relatively small number of Medicare Part B enrollees with higher income, approximately five percent, will pay a higher premium based on their income. The actual amount depends upon the extent to which an individual beneficiary's income exceeds $82,000 (or a married couple's income exceeds $164,000). The maximum premium could be as much as $238.40. The Medicare Part A deductible, which is a beneficiary's only cost for the first 60 days of inpatient hospital care, will increase by $32, to $1,024. The skilled nursing facility daily co-insurance payment, which is payable after 20 days of care, will increase by $4.00 to $128 per day. The Part D (prescription drug) premium is expected to average about $25 for beneficiaries who stay in their current plans, an increase of $1 over last year, according to the Department of Health and Human Services.

Official notice

The SSA's official publication of the formula adjustments, cost-of-living increases, and tax and wage bases that will affect Social Security benefit computations in 2008 and its explanations of how the adjustments are calculated will appear in the Federal Register by the end of October.

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