Here's the future… you pay Social Security tax on ALL of your income?
It's unfortunate that most politicians and economists don't explain our $34 trillion dollars of debt in a more simple fashion, so here's some insight on how the basic math works. If you really understand the math, it's not hard to deduce what outcomes may arise in the future. With another four years of the current tax policies, you can be certain both at the individual level and the corporate level that a perpetuity tax on Social Security will become front and center. Here's why:
Revenue Streams: A Closer Look
If you think about the Government like a business (a badly run one), we really have three broad ways we bring in income since the Government doesn't sell cheeseburgers and we don't make money putting things on Amazon. Here's what they are:
- Personal Income Tax: 47% of U.S. revenue
- Payroll Tax (Social Security and Medicare): 37% of U.S. revenue
- Corporate Income Tax: 9.5% of U.S. revenue
Fiscal Deficits and Top Expenses
On the opposite side of the ledger, we run an annual fiscal deficit of roughly $1.8 trillion dollars and here are the top four expenses.
- Medicare/Medicaid: 24% of spending
- Social Security: 22% of spending
- Defense: 13% of spending
- Net Interest On The Debt: 11% of spending
Navigating the Fiscal Maze: Solutions and Challenges
Unfortunately, most of us
don't have a printing press in our basement that will spit out thousands of
dollars let alone the trillions of dollars of money we print on what seems to
be a regular basis. So, how do you clean up this mess? How do you
potentially 'balance' the budget? The simplicity of this is that you
either have to decrease expenses, increase revenue, or have some combination of
both.
As of its latest stance, The Social Security Board of Trustees now estimates that based upon current law, in 2041, the Social Security Trust Funds will be depleted. If you don't understand how Social Security tax, FICA on your paystub, works today, here's a basic explainer:
- As an employee, you pay 6.2% of every paycheck into Social Security until you hit the FICA wage base cap which is $168,600 in 2024.
- In addition, your employer ALSO pays the same 6.2% with the same cap.
- If you are self-employed, you get the full enjoyment of paying both halves of the Social Security tax (note: you do get a small tax deduction come tax filing time)
The current administration
clearly came out in 2023 saying that they would like to see payroll taxes
become a 'perpetuity' tax once you hit the $400,000 mark of income. This
means that both YOU and YOUR EMPLOYER would be responsible to pay in an additional
6.2% on every dollar of income you earn above that level. This is
actually a slightly backhanded way of increasing corporate tax while you
increase personal tax on Americans working hard to earn money. And,
because the "donut hole" - the amount you make between $168,600 and $400,000 is
not that great of a gap anymore, it doesn't take a huge leap of logic for the
Government under current policies to just author up that Social Security
becomes a perpetuity tax when the tax cuts expire in 2025.
Preparing for the Fiscal Paradigm Shift
With almost half of
American families paying no federal tax whatsoever, it's no big surprise that
the only solution that keeps coming up in current discussion is to tax the
wealthy more. Where else will you get it from if 50% of the people pay no
federal tax? You get it from those that are paying and make more money.
Corporations only make up 9.5% of the revenue we generate. Increasing
their tax could make a dent, but it's not even close to payroll tax we collect
as a country. So, buyer beware, that a perpetuity tax on Social Security
will be one of the top targets you could see come over the next four years that
will affect both you and your employers.
Tick tock. Tick tock. The $34 trillion in debt keeps on ticking and just might cost some of you 6.2% of every dollar you make.
