The Social Security Wage Base, the amount of income to which individuals are subject to Social Security tax (or, for self-employed persons, self-employment tax), will increase from $113,700 in 2013 to $117,000 in 2014. In percentage terms, the increase is 2.9 percent. Meanwhile, Social Security benefits will increase only 1.5 percent from 2013 to 2014. Also, the limits on individual contributions to 401(k) plans will not change at all from 2013 to 2014. Why is this so?
It is so because the Social Security Wage Base is indexed based on labor cost increases, as reported by employers on forms submitted to the federal government. The costs are those employers report as being subject to income tax plus contributions to qualified plans. In contrast, Social Security benefits are indexed based on the Consumer Price Index (CPI). The contribution limits on 401(k) plans and other retirement plan limits are also tied to the CPI, and then rounded to a next lowest multiple. For 401(k) plans, the next lowest multiple is $500. For the Code section 415(b) limit on defined benefit plan annual benefits in retirement, the next lowest multiple is in $1,000.
Whether increasing the Social Security Wage Base in a manner different than the manner in which Social Security benefits are increased is fair is a matter for discussion. At first blush, it would seem fair. However, a fairer question might be why the CPI has changed significantly over the years, and whether some the changes were unjustified.
