FICA and Social Security

To be honest, I’ve found this very puzzling for years: if you are like most people and you look at your paycheck, you’ll see that your employer takes FICA (Federal Insurance Contributions Act) taxes out at a rate of about 7%.  It goes to cover Social Security and Medicare, and of course much has been made of how those programs are under-funded.  You’d think there was something inherently wrong with the programs and there is.

It’s just that it’s not what you think.

If you are among the roughly 95% of Americans who earn less than $106,800, then you may not know that the 5% of us who earn more stop paying that tax after we reach $106,800 in pay for the year. Yep, that’s right: if you make $213,600, you’ll stop paying into FICA entirely in about mid-June.  It’s like getting a 7% pay raise!  Oh, and for good measure: FICA doesn’t tax investment income, either.  Just wages and salaries.

It’s a regressive tax: while a person who makes $75K per year, all of it in wages and salaries, pays 7% of their income into FICA, a person who makes $320K in wages and salaries and another $80K in investment income would pay less than 2%.  Yikes.  (Warren Buffett has pointed out, even worse, that almost all of our tax structure works like that.)

And it matters, too: if we just went ahead and made it a flat tax — everybody just pays 7% of their income into FICA –, Social Security and Medicare would be nicely funded for the next 78 years!  Or, how about this one?  Drop the rate for everyone to 5% without a limit, and 95% of Americans get a nice little tax break while Social Security and Medicare are funded well into the middle of this century, and probably beyond.

It’ll never happen, but this particular over-$106,800 guy would support it in a New York minute.