The US Social Security system consists of a tax on employees and on employers. The main components are 1) Social Security 2) Medicare.
How Social Security Taxes are Calculated:
The social security tax rate on individuals is 6.2% up to $106,800 (this amount has been increasing annually, that is the 2011 “cap”) and this rate was reduced to 4.2% in 2011.
The social security tax on employers is also 6.2% up to $106,800. The employer tax percentage was not reduced in the 2011 “payroll tax holiday” that was put in place as part of the grand budget compromise last year.
For medicare – it is 1.45% on employees with no limit, and for employers it is also 1.45% with no limit.
In total – if you are self employed, it is (6.2+6.2 less 2% tax holiday) or 10.4% FICA up to $106,800 and a medicare tax of 2.9% up to your total income.
The Social Security “Trust Fund”
The revenues from social security go into Federal government coffers. Then benefits are paid out of Federal funds. Technically the “surplus” of social security revenues over amounts paid out goes into a trust fund but there is essentially nothing “saved” in a real sense, just an “IOU” from the Federal government promising to use their taxing (and more likely, their borrowing) power in the future to meet this obligation.
While many people have been skeptical about social security’s ability to pay out benefits in the past (including a recent candidate who called it a “Ponzi scheme“), there was at least a logical smidgen of truth to the fact that the US government attempts to tax in a clear fashion from workers that will someday benefit from social security and then pay out benefits in a consistent manner.
Recent Tax Proposals
Recent tax proposals, however, start to remove the last fabric of the lies that allowed social security to be seen as anything other than another government entitlement program, funded by a mix of taxes with a lot of borrowing thrown in (at an unsustainable rate). The new proposals cut the individual rate to 3.1% (and the employer percentage down to 3.1% for smaller payrolls), a reduction from the pre-holiday combined rate of 12.4% down to 6.2% (for smaller companies). There is a separate $50M holiday for companies increasing payroll that makes this calculation more complex, and the medicare portion stays the same at 1.45% for employer and employee to total 2.9%.
Since social security can barely cover its current obligations now out of tax revenues, likely these changes will move it into the red immediately, and eliminate the fiction that the surplus is “saved” in a trust fund anywhere at all. Now social security looks like any other tax program, subject to the whims of the government and changing policy preferences, rather than a pension plan which it is made out to be.
Taxes and Behavior
The current administration is curious. On the topic of raising rates, they don’t think that it changes behavior. Specifically, they fought the prior administration’s tax reduction as “giveaways” to the rich who could afford to pay taxes, as if the rich would work just as hard in order to provide an ever increasing percentage of their income to the government.
But they DO believe that reducing rates can incent behavior other times, such as in “cash for clunkers” or the previous tax reduction holiday. More specifically, they take a myopic short-term view that putting a bit of extra cash into workers’ pockets will help their constituents, but making a more competitive tax policy overall (that will spur investment and growth) isn’t anything that is worth investing in or considering. I am frankly kind of surprised that it took the administration this long to consider a payroll tax holiday, since all they care about is the short term impact on their logical supporters, and this is the quickest way to reach them. I wouldn’t be surprised if the government tried to turn hiring into a tax INCENTIVE, and then just raised taxes everywhere else, or just borrowed more money. If your only goal is to put money in your supporters’ pockets in the short term, this is a (sad) way to do it.
At least these policy proposals put a lie to the myth that social security is anything other than an entitlement program supported by government tax revenues. If nothing else positive comes out of the debate, a little bit of more obvious truth is a small benefit.
Cross posted at LITGM
Good post Carl. We all need to get educated on how the SS system works.
For those of you who want to get into more detail SSA’s “Social Security Handbook” is a fabulous resource:
http://www.socialsecurity.gov/OP_Home/handbook/ssa-hbk.htm
For those of you who want to understand the policy options that are being discussed, the CBO did an excellent study “Social Security Policy Options” in July 2010 laying out the options, their benefits, and their costs:
http://www.cbo.gov/doc.cfm?index=11580
The “employer contribution” is a deceitful fiction. In truth, the “employer contribution” half of the social security payments is made by the employee.
The market cost of hiring and employee is the total compensation paid by the employer. That includes all taxes, insurance, compliance etc. How much of that makes it from the employers pocket to the employee’s is irrelevant. The money that the employer shells out is the price that the market says the employee is worth. Without those imposed cost, the market would force all that money into the employee’s pocket instead.
So, Social Security tax is a 6.2%+6.2%+2.9%= 15.3% flat i.e. non-progressive tax, on the first $100,000 dollars of income.
It is one of the grand hypocrisies of the Left that they rail against flat taxes in all other circumstances but when it comes to Social Security, they’re just fine with non-progressive taxation.
Thanks Shannon, I was going to say exactly that. There are two big lies of social security / medicare. The first is that behind the scenes there is some sort of trust fund / investment going on, in reality it is just one generation being taxed to pay for the entitlements of previous generations. The second lie is the idea of an “employer contribution”. In reality it’s just a clever means of keeping individuals ignorant of the true scope of their taxes by only showing half of it on paystubs.
These lies are easier to sweep under the rug with smaller amounts of spending but they become more problematic the larger the entitlements become as a share of total tax revenue, and they have grown exceptionally large of late. It goes a long way to explaining why social security / medicare have been such difficult problems to tackle. How can you tackle a problem when you have yet to get past fundamental lies at the core of how the system operates?
Let us just do this per $100 of nominal wages. The taxes are:
Employee:
FICA $6.2
Med $1.45
Employer:
$7.65
Total $15.30
Percentage of nominal wages = $15.30/$100 = 15.3%
Percentage of employer gross = $15.30/($100 + $15.30) = %13.3
Social Security was sold to the people by FDR as an insurance plan that provided financial support after age 65. Every wage earner was required to pay 15% of his/her wage. All of us paid – many of us starting at age 10 with our first job selling newspapers on street corners or working as hotel page boys and runners or as drummer boys or chimney sweeeps. A lot of us never lived long enough to collect.
Of course, in order to get the law past the Supreme Court, FDR lied and said it was a tax.
Now the money is gone. It is gone because somebody stole it. We all know who stole it. We watched them pass the laws that let them steel it. So now they want us to send them more money so that they will have money to send back to us after they pay themselves “expenses”.
In today’s government steeling and lying are rewarded and only crazy Tea Party people tell the truth. If anyone tries to force the thieves to give back the money, they are called terrorists.
@Robert Schwartz:
Shouldn’t the actual compensation number be $107.65; that is, the nominal $100 plus the $7.65 in taxes ‘paid’ by the employer?
This makes the second set:
$15.30/$107.65 = 14.21%