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Your payroll taxes go into bottomless hole

Updated: May 3, 2013 12:14PM



W hy do you work? It's not a silly question to ask on Labor Day. While some fortunate people will respond that they work because they love what they're doing, most will say they work to make money to support themselves and their family.

It's worth thinking about why we work on this Labor Day holiday. No one forces us to get up in the morning, travel on the crowded roads or trains to get to our jobs. Yet we do it and we are mostly grateful to be employed.

In fact, as we look around to see the U.S. unemployment rate inching up to 9.6 percent, many people feel both uneasy at the prospect of unemployment and perhaps willing to work even harder to show the boss we deserve our paycheck.

It's the paycheck that matters. You look at the bottom line, measure the bills that must be paid out and then move on to the next week's work.

But let's take a closer look at that "bottom line." As you've long ago learned, there's a big difference between your salary and what you take home. For most workers, the largest deduction is for FICA.

(Do you know what the initials FICA stand for? Federal Insurance Contributions Act. That deduction out of your paycheck each week is a "contribution" -- a word that is typically synonymous with "voluntary." Except, of course, in the case of the FICA payroll tax.)

FICA is the deduction for Social Security (old age, survivors and disability) and Medicare. It consumes the first 15.3 percent of your earnings. Half is taken out of your paycheck, and your employer pays the other half. But since the employer must pay, you know it is money that might otherwise have been available to increase your salary. So, in effect, you're paying the entire amount.FICA history

In case you're interested, the FICA tax started in 1937, when Social Security was enacted. Here's how the tax grew between then and now, always divided in half between employee and employer. Maximum Year Rate tax base

1937-1949 2% $3,000

1950 3% $3,000

1951-1953 3% $3,600

1963-1965 7.25% $4,800

1972 10.4% $9,000

I've skipped a few steps, but you can see how both the rate and the taxable income base ratcheted up over the years, with the big jump coming in 1966, when the relatively small Medicare tax of 0.35 percent was first added. (If you want to see the entire chart go to TaxFoundation.org and search for FICA rate history or www.taxfoundation.org/files/soc_security_rates_1937-2009-20090504.pdf.)

But even the figures for 1972 seem nostalgically low, when compared with the increases that took place when Social Security was "drastically overhauled to make it solvent for baby boomers" in the late 1980s.

Those were the words used to "sell" a rate increase to 15.3 percent on a tax base of $51,300 in 1990.

In the next 20 years, the rate of 15.3 percent has remained the same, but the tax base had doubled to $106,800 by 2009.

Yes, inflation has cut into the value of the dollar. But even so, you'd think Social Security would be flush with money given all the taxes working people have paid in over the years.Where FICA went

The problem arose when the Social Security "Trust Fund" started accumulating cash to meet its future obligations. Immediately after raising the tax rates in the late 1980s, the Treasury decided it made no sense to have cash being "invested" in Treasury securities in one fund, while the government was running a budget deficit in its own annual account.

So they merged the two funds! The growing surpluses in the Social Security "trust fund" were merged with the growing deficits in the U.S. government's annual budget every year.

And now, even with the "surplus" Social Security trust fund, we're going to run an annual budget deficit this year estimated at $1.5 trillion!

So where did all that FICA money go? Down the drain of federal spending on everything. It's certainly not sitting in an account waiting to pay your retirement benefits.Who cares?

FICA is the one tax that is paid by all workers. You might not pay any income taxes on your earnings. In fact, the Tax Foundation estimates that 41 percent of the working population pays zero in income taxes.

But all workers do pay the FICA payroll taxes (although many low-income families get credits to offset that payroll tax).

How long will it take for today's workers, looking at that big chunk of money taken out of their weekly paycheck, to realize that they have little or no chance of getting any of it back in their old age. Even baby boomers, who contributed all their working lives, will see only a modest stipend from Social Security.

Yet it's the biggest deduction on your paycheck every week, unless you're contributing a substantial amount to your employer's 40l(k) or 403(b) plan. Sure, the stock market is scary at times but has proven a winner over the long run. Compare that to the guaranteed loss of value in your FICA deduction.

That's something to think about this Labor Day holiday. And that's The Savage Truth.

Terry Savage is a registered investment adviser. Post questions on Terry's blog, terrysavage.com, and at suntimes.com/savage.



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