Social Security Wage Base
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For the OSADI or Social Security system, the SSWB or the Social Security Wage Base is the maximum earned income or upper threshold on which a wage earner's FICA or Social Security tax may be based. In 2006 it is $94,200 and the FICA tax rate is 6.20%. A person with $10,000 of earned income will have $620 taken as FICA from his check. While someone with a $100,000 earned income will pay $5,852.80 or an average rate of 5.85%. A person earning a million dollars will pay the same $5,852.80. However, in exchange for capping the FICA tax, the SSWB is also used to calculate the eventual Old Age benefit as well as the Disability benefit from a person's PIA or Primary Insurance Amount. The PIA is 90% of the wage earner's Average Indexed Monthly Earnings (OASDI) (AIME) up to the first bendpoint plus 32% of the AIME in excess of the first bendpoint if any but not to exceed amounts of AIME in excess of the second bendpoint plus 15% of the AIME in excess of the second bendpoint if any. For the Old Age benefit this PIA is first calculated at age 62 and if the wage earner does not retire, any earned income taxed in that year is used to update AIME so that AIME would increase with wage indexation and replacement of a low wage year with the current year.
In 2007, the SSWB is $97,500. For previous years, it has been:
- 2006 - $94,200
- 2005 - $90,000
- 2004 - $87,900
- 2003 - $87,000
- 2002 - $84,900
- 2001 - $80,400
- 2000 - $76,200
- 1999 - $72,600
See here for all years.
[edit] Use in pension plans
The pension compensation nondiscrimination laws (Internal Revenue Code Section 401(a)(4)) require that qualified pension plans not discriminate in benefits, rights and features in favor of highly compensated employees (in 2005, the threshold is $90K of 2004 gross pay including bonuses and overtime). However, since Social Security provides a progressive benefit formula and stops taxation at the SSWB, pension plans may integrate benefits or contributes according to a wage base, frequently at a fraction say 20%, 80% or 100% of the SSWB.
see Social Security Wage Base
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