Social Security Taxes 101

There has been a leak here. Government officials have let it be known what the details of President Bush’s Social Security plan are. (AP) “President Bush is expected to unveil his plan for a Social Security overhaul in late February, with administration officials eyeing investment accounts that would hold two-thirds of workers’ annual payroll taxes. An administration official, who spoke on condition of anonymity, said the size of the private accounts could be similar to those in a proposal by Sen. Lindsey Graham, R-S.C., and the main plan from Bush’s 2001 Social Security commission. The White House cautioned Tuesday that Bush had not decided on a specific plan. But the administration is leaning toward letting workers divert 4 percentage points of their 6.2 percent in payroll taxes ? almost two-thirds ? into investment accounts, up to $1,000-$1,300 a year, the official said. The remainder of the workers’ payroll taxes would continue going into the system.”
Now, once again, I’m sure many of you are stunned and shocked and amazed at the size of this 4% when we’ve been told it’s 1 to 2%, but this is written in a way to make this sound bigger than it is and this is a common mistake that everybody makes. I have warned you people about this on previous occasions and I’m going to do so again. Your Social Security payroll taxes are not 6.2%. You contribute 12.4% of your earnings up to 90,000 this year. You contribute 14.2% into Social Security, 4% will be going to your private divested account, not two-thirds, but actually less than one-third.

How can this be, Rush, I only pay 6.2% and my employer matches it. No, your employer doesn’t match jack diddly-squat, folks. The contribution is 14.2%, everybody pays 14.2%. It’s a myth that your employer pays half of it, and you pay 6.2% and he matches it. The simple fact of the matter is every American, 14.2% of what they earn, goes to Social Security. You just never see half of it. You only have the 6.2% deducted, your employer does pay the rest but it all goes into what his cost of employing you is. So you’re paying it all. Your employer is not matching anything. If you don’t understand it this way, imagine that your salary is 6.2% larger — well, imagine that your salary has the additional amount of your FICA deduction as a gross attached to it, because it does. So if every employee donates 14.2% or is taxed at 14.2% for FICA and 4% is going to go to the private investment account, that’s less than one-third, not two-thirds.

This is a big, big bugaboo of mine. I have been on this for 16 years. All this gobbledygook about the employer matching — if you want to find out how the employer matches do this, go out and become self-employed and find out if all you pay is 6.2%. I got a secret for you. You’ll find out you’re paying a lot more than 6.2% when you go out there and are self-employed as an independent contractor, as a lawyer, as a doctor, or whoever else qualifies as an IC. You pay the whole shebang, just as you do even though they have tried to tell you that you don’t, your employer is matching.
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