Jack Strayer: Festering FICA fiascoPublished 12:18pm Friday, May 6, 2011
When filing your federal taxes, you probably noticed the box on your W2 form marked FICA. That’s the Federal Insurance Contributions Act, a.k.a. the payroll tax. It is a 7.65 percent tax on your gross income. Employers match the 7.65 percent. You are paying 6.2 percent into your Social Security and the remaining 1.45 percent into Medicare. All the FICA taxes that you pay each year, plus your employer’s matching contribution to FICA, are deposited into Social Security and Medicare. In short, the FICA taxes you pay are funds that cover your Social Security checks and your Medicare benefits after you retire.
Earlier this year, the Obama administration and the U.S. Congress extended the Bush income tax cuts. The bipartisan agreement included a reduction in the individual Social Security portion of the FICA tax rate from the current 6.2 percent to 4.2 percent. This is a one-year-only tax break and it means that Social Security will take a big hit in revenue – about $120 billion, according to the National Center for Policy Analysis (NCPA), the Dallas-based research institute. The employer matching contribution to F.I.C.A. remains unchanged at 7.65 percent and is unaffected by the cut. The tax cuts were touted as a stimulus package for individuals in an effort to jump start the fragile economic recovery.
As Forrest Gump would say, “Stupid is as stupid does!” Many readers are probably cursing me right now for suggesting that a tax cut is stupid. Well, excuse me, but cutting FICA taxes right now is stupid!
The Social Security Trust Fund is already paying out more than it is collecting in FICA taxes, creating a $107 trillion unpaid liability in the years ahead, according to the NCPA. That’s because 78 million baby boomers will soon begin receiving Social Security checks and Medicare benefits including prescription drugs.
The Social Security Trust Fund will be drained by 2020, according to the most recent estimates from the Trust Fund trustees. Both Social Security and Medicare will go belly up by 2030 unless we cough up the additional $107 trillion. Sadder still, these estimates are based on a good economy with average unemployment.
Currently, the FICA tax is only levied on the first $106,800 of individual income. This tax cap is likely to be dramatically increased in the next few years. Most people aren’t aware that a tax cap exists for FICA. But apparently there is a lot that people don’t know about FICA, including President Obama and the U.S. Congress. After all, they cut the FICA tax this year, instead of increasing it.
After the current FICA reduction expires next year, the U.S. Congress and the Obama administration will have their work cut out for them. Look for a major increase in the cap on earnings. Look for means-tested Social Security checks in the future. Look for better ways to supplement your retirement savings!
If you are nearing retirement age and are depending on Social Security and Medicare to be there when you are ready to receive it, you better start paying attention, as well as paying even more for your FICA.