Financial Focus: COVID and the Payroll Tax — Do We Take Our Social Security Now?
As we get ready for an Electorial Presidential race where we have heard very little on proposed policy issues, we heard a Whopper of one the other day from our President.
Trump said, if re- elected, he'll get rid of the payroll tax.
So, what's the payroll tax?
The payroll tax is a tax withheld from an employee's salary by an employer who remits it to the government on their behalf. The tax is based on wages, salaries, and tips paid to employees.
And it is remitted for Social Security & Medicare!.
The current tax rate for social security is 6.2% for the employer and 6.2% for the employee, or 12.4% total. The current rate for Medicare is 1.45% for the employer and 1.45% for the employee, or 2.9% total. Combined, the FICA tax rate is 15.3% of the employees wages.
So if we only count " the employee contribution portion, this would be 7.65%. On an employee salary of $50,000, this would be, on the one hand, $3,825 in the employee's pocket. On the other hand, it could be $3,825, a year out of their Social Security fund.
But the President says he has a solution for that too! That Social Security could be paid , not out of a mandatory fund designated for that purpose but of the general fund, the same fund that pays for everything else, from defense, to food stamps!.
In fiscal year 2019, federal payroll taxes generated $1.24 trillion, which amounts to 5.9 percent of the nation's gross domestic product (GDP), or 35.9 percent of all federal revenues. This means, to pay for current Social Security & Medicare , we will need $1.3 trillion from the " general fund".
If the current US Budget is $4.4 trillion, that means we will need 36% more revenues or 36% more in budget cuts.
Will US Citizens or businesses accept a separate 8% tax to make up the difference?
Can the Government hope, that US Bonds, which now help to fund Social Security but are now paying a historically low 3%, will go up to 8%?
Is it possible that Congress & The President will readjust the budget to 8% budget cuts every year to make up the difference?
While of course during this pandamic, people need and can use every dollar they can use their hands on. But the answers on both sides of the political aisle has been attrotious.
The $1200 stimulas check , based on the above example ($50,000), only contributed 2.4% of their salary. For businesses, the PPP program has been administered poorly as more rich organizations enjoyed the assistance than your " mom & pop" grocery stores . The Democrats & Republicans have proven by these two programs that they do not know how to handle a crises.
But we are indeed getting desperate if we are to believe that future Social Security can come out of the general fund for the sake of some immediate money, abeit good, in our pocket.
As we get ready to go into our 7th month of this crises, no one truly has the solution. It's safe to say, again using the above $50,000 example, that we are looking at an economic loss of close to $30,000. But that's just on the surface as many have lost their jobs, can not put food on the table or properly take care of their families.
Do we risk our future, now by eliminating the Social Security tax and " hope" that the Government will have our back during retirement? This is a question all people, especially 30-40 year olds should be asking themselves right now.
Professor Anthony Rivieccio, MBA PFA, is the founder and CEO of The Financial Advisors Group, celebrating its 24th year as a fee-only financial planning firm specializing in solving one’s financial problems. Mr. Rivieccio, a recognized financial expert since 1986, has been featured by many national and local media including: Kiplinger’s Personal Finance, The New York Post, News 12 The Bronx, Bloomberg News Radio, BronxNet Television, the Norwood News, The West Side Manhattan Gazette, Labor Press Magazine, Financial Planning Magazine, WINS 1010 Radio, The Co-Op City News, The Bronx News, thisisthebronX.info, The Parkchester Times and The Bronx Chronicle. Mr. Rivieccio also pens a financial article called “Money Talk”. Anthony is also currently an Adjunct Professor of Business, Finance & Accounting for both, City University of New York & Monroe College, a Private University. You can reach Anthony at 347.575.5045.