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January 31, 2005

True Cost of FICA

No offense to Andy Roth, but just looking at the FICA figure on your W-2 doesn’t give you the full picture of how much you are paying in to the Social Security system. It only gives you half of the picture. Just as the withholding of income taxes by employers has done a masterful job of disguising workers' true income tax burden by using the "out of sight, out of mind" technique, most people fail to see how much their annual contributions to the SS system are if they are W-2 wage slaves (as I like to call people who don't work for themselves). Any employers out there will agree with this. When determining how much we can pay our workers, the taxes and other costs we are forced to pay are taken into account. We would much rather pay those additional amounts to our workers than send them to Washington, where they will almost certainly never benefit our workers. My point is that the 6.2% FICA tax that is matched by the employer doesn't just come from nowhere. It is money that effectively belongs to and is part of the cost of employing the workers. The actual total being taken from workers is 12.4% of earned income. In fact, when working with clients to determine a fair pay rate for workers who are transitioning from W-2 employees to 1099 or incorporated independent contractors, I suggest that they pass the tax savings directly on to the workers in higher hourly pay. The employers still come out ahead because they avoid the cost and hassle of having to mess around with withholding taxes. The White House description of the situation does mention the growth in the SS tax from 2% to more than 12%. This makes the two percent figure that is most often mentioned as being allowed to be set aside into personally owned accounts a much smaller percentage of the total than if it were to be compared with just the 6.2% figure. As we all know, we also are forced to pay in Medicare taxes based on the same income which is subject to FICA. Until recently, these taxes were computed together. Then, our rulers uncoupled them and raised the ceiling on the income subject to the Medicare tax, and then just removed the ceiling altogether. While this blog is focused on Social Security, there are too many similarities between SS and Medicare to ignore them. Just as most people are under the false impression that their SS tax payments are being deposited into a special protected trust fund just for them, most people believe that the Medicare taxes being paid in now will cover them in their retirement years. Nothing could be further from the truth. Just as current SS tax payments are used to pay benefits to current retirees, the current Medicare taxes are being used to pay for the current costs of Medicare. There is no pot of money waiting for us. Both SS and Medicare are direct transfers of money from current workers to current retirees.

Posted by Kerry Kerstetter at January 31, 2005 6:52 PM | Print