If you check your paycheck stub, you find an entry labeled FICA, which is an acronym for Federal Insurance Contributions Act. Your “contribution” is matched by your employer and is deposited in the Social Security Trust Fund. It shows you how much money was paid into the Trust Fund by employers, employees, and the self-employed in 1998 (the figures used are from the IRS).
The original expectation was that the Trust Fund could fully support all future pension payments. Since 1935, several major changes have occurred both in the nation and in the program, including the increased life span of the average American. More people are living longer, with the result that the original estimates of how much funding people would need have had to be revised sharply upwards.
The Federal Insurance Contributions Act (FICA) tax is a United States payroll (or employment) tax imposed by the federal government on both employees and employers to fund Social Security and Medicare —federal programs that provide benefits for retirees, the disabled, and children of deceased workers. Social Security benefits include old-age, survivors, and disability insurance (OASDI); Medicare provides hospital insurance benefits. The amount that one pays in payroll taxes throughout one’s working career is indirectly tied to the social security benefits annuity that one receives as a retiree.
To provide additional income for the Social Security Trust Fund, Congress has legislated many major changes, including:
The worker’s contribution for the defined pension benefit has increased from 1 percent to 6.2 percent of earned income up to a designated maximum, and the employer matches this amount. The self-employed pay both the employee and the employer contribution. The rate of 6.2 percent has remained constant since 1990.
The “normal” retirement age of 65 is being adjusted upwards in gradual steps and will be 67 by the year 2027.
When the program started in 1935, it subjected only the first $3,000 of income to the Social Security tax. The amount of income, called the earnings base, subject to the tax has risen steadily to $72,600 in 1999. The Social Security Administration calls this the maximum taxable amount, and it increases annually.
Participation in the Social Security program has been extended in various ways so that coverage is almost universal.
Cost-of-living adjustments (COLAs) were added to the benefit structure in 1972, which increased the costs of the program.
Although not part of the contribution to the Social Security Trust Fund, all employees and employers also pay, as part of the FICA, an additional 1.45 percent on all earnings (with- out limit on the taxable earnings base) to support the Medicare program. The total of both contributions is 7.65 percent. The employer contributes an additional 7.65 percent. So for each individual participant, a total of 15.3 percent of income, up to the base level, is contributed each year.
What does all this mean for you, the prospective retiree?
- Any significant increase in Social Security benefits is unlikely.
- You will probably continue to see raises to the contribution rate, to the taxable earnings base, and to the normal retirement age.
