The Social Security tax is officially known as the OASDI (Old Age, Survivors, and Disability Insurance) tax and funds the Social Security program under which millions of Americans receive disability, retirement and survivorship benefits. In fact, Social Security is often the only source of steady income for people who can no longer work and for those with modest earnings history.
The tax is one of the two components of the payroll tax in the United States, and is levied on both employers and employees. Accordingly, the Social Security tax must be withheld from wages in the form of a payroll tax authorized by the Federal Insurance Contributions Act (FICA), or a self-employment tax authorized by the Self-Employed Contributions Act (SECA).
The Social Security program provides benefits to retirees and those who are otherwise unable to work due to disease or disability. Notably, Social Security benefits represent roughly 33% of the income of the elderly.
The payroll tax rate for 2019 for an American worker is technically 15.3%. But since it is assessed on both employers and employees, workers are responsible for covering half of it — 7.65%. Of this, 6.2% goes to Social Security.
The following provides the break-up of the payroll tax:
It should be noted that the Social Security tax is assessed only on earned income like salaries, wages, bonuses, tips and income from an actively-run business. Hence, passive-income sources, such as rental income, dividends, and income from a non-participating business are not subject to the Social Security tax.
Also, the Social Security tax is a regressive tax, meaning if a person makes less money, a higher portion of his income goes to this tax compared to taxes collected from high-income counterparts. For 2019, the maximum social security wage base is $132,900. This increases by $4,500 from the 2018 wage base of $128,400.
How Safe is This Safety Net?
Going by the annual trustees report, during 2018, earnings of approximately 176 million workers were covered by Social Security and they paid payroll taxes on these earnings. For 2019, the number increased to 178 million workers. This is projected to support Social Security benefits of nearly 64 million Americans who will receive more than a trillion dollars in the ongoing year.
Additionally, in 2019, beneficiaries witnessed a 2.8% cost-of-living adjustment to monthly benefits, the largest increase since 2012.
While these figures give social security recipients reasons to cheer, the upcoming plan deficit raises questions on the sustainability of the benefits. Specifically, Social Security’s total cost is estimated to exceed its total income starting in 2020. Other than higher plan spending, the declining ratio of workers to retirees, as well as the longevity of people collecting these benefits, is draining funds from the program.
Presently, there are 2.8 workers for each Social Security beneficiary. By 2035, the ratio will decline to 2.3 covered workers for each beneficiary. Also, in 1940, the life expectancy of a 65-year old was around 14 years. Currently, it has increased to nearly 20 years, resulting in people collecting benefits for a higher number of years.
Amid these concerns, President Donald Trump has been considering new payroll tax cuts. This may come as a breather for American workers, allowing them to take home a fatter paycheck. However, many believe that such a policy will be detrimental to the Social Security and Medicare funds (which is expected to face financing shortfalls starting next year) unless the lost tax collections are replaced by some other revenue source.
Additionally, since Social Security is a "pay-as-you-go" system, meaning tax collected from current workers is used to pay for benefits of current retirees, any tax cut may jeopardize the benefits paid to current retirees.
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