When you get your first paycheck from a new job you might be surprised to see how many different deductions reduced your earnings.
You’ll see deductions for Federal income tax, state income tax if your state charges it, and a whole host of acronyms of other taxes.
One of those taxes is social security tax.
We’ve all heard of it, but what exactly is Social Security tax?
What is Social Security Tax?
If you’ve ever been paid W2 wages by an employer (which is how a majority of people are paid), you’ve likely seen one of the following on your pay stub:
- Social Security
These little categories often eat 15%, 20%, or 25% of every single one of your paychecks.
That frustrating category is Social Security.
What exactly is Social Security tax?
It is a tax levied on wages up to a certain level to fund social support programs such as Social Security. (A separate tax is levied for Medicare.) The programs are known as social programs because all employers and employees pay into the fund, and almost anyone can be paid by the funds. The social security funds provide some income for retirees and also pay for those are who are disabled to the point they cannot work. The funds support a general social safety net.
How Much is Social Security Tax?
After you get used to the fact the government is taking a significant chunk of your paycheck it can become somewhat easy to ignore. You’re not going to change it, so you simply accept whatever your net pay is. But you shouldn’t ignore such a large amount of money coming out of each check.
Here’s how Social Security tax is paid by both employees and employers.
Under normal circumstances the tax rate that employees pay into the Social Security fund comes to 6.2% of their wages. However, current tax legislation enacted by the government has given a 2% reduction in in this rate in hopes of bolstering the economy. The current Social Security tax rate for employees is 4.2%.
While employees pay 6.2% of their income to Social Security, what many people do not know is that their employer also pays an additional 6.2% into the fund. While employees have received a tax break of 2% this year, employers have not and pay the full 6.2%.
For Self-Employed Individuals
If you are self-employed you are essentially employee and employer at the same time. That means you pay both taxes of 6.2% for a total of 12.4% of your wages. However, during this year you do get the benefit of the 2% reduction for employees so the tax rate falls to 10.4%.
Will I Ever Benefit from Social Security?
One of the common questions around Social Security is if I am currently paying in and have decades until retirement, will I ever see any benefit?
That loaded question has many answers.
As things stand right now Social Security will run out of funds around 2033 according to a recent Wall Street Journal report.
But that is as things stand right now.
Bloomberg estimates that Social Security is underfunded by over $20 trillion or about 31%. That would mean to just stay even with the current gap that the tax rate would have to rise an equal amount — 31% on top of 12.4% — of 3.9%. That would likely mean employees would start paying almost 2% higher than they are supposed to be paying on top of removing the current tax break. Where you are currently paying 4.2% and supposed to paying 6.2% you would then bump your payments up to 8.2%.
There are other alternatives, but any fix to the current Social Security problem is likely to be unpopular with a significant portion of the population. You can continue to raise the retirement age so that individuals that are paid Social Security income are not on the payroll for as long. You could simply reduce the benefits to be paid in the future to a smaller amount.
Or you can raise taxes.
This naturally puts Congress and the Federal government in an awkward position. If they raise taxes, they’ll probably be voted out of office by mad working constituents. If they delay retirement age or reduce benefits, they risk making those voters mad, too.
Social Security at its core is a good idea.
Some people are truly disabled to the point they cannot provide for themselves and a social safety net makes sense. Likewise despite even the best intentions not everyone will save adequately for retirement. Having some sort of safety net for these individuals is a smart thing that a developed society can accomplish.
However, as things currently stand Social Security has a massive problem. With gaps in the trillions of dollars and almost 1/3 underfunded, some sort of change is necessary to keep the social programs afloat.
Just exactly what is the fix? Only time will tell.