A well-known political pundit spent the months leading up to passage of the Affordable Care Act questioning how Americans would view health insurance benefits if they paid for their own care out-of-pocket and then sought reimbursement from their insurance companies. The pundit’s comments actually made a lot of sense. So much sense that it begs the question, what if employees knew more about FICA withholding?
FICA withholding is this intangible, somewhat surreal activity engaged in by employers and the IRS without workers paying a whole lot of attention. Moreover, FICA is rarely discussed during political campaigns when candidates love to talk about cutting taxes. Maybe someone needs to start the discussion. The average American worker pays more FICA than actual income tax.
A Brief Definition of FICA
FICA withholding is a combination of withholding for both Social Security and Medicare, explains BenefitMall, a nationally known provider of payroll processing and benefits administration services. Both employers and employees pay a portion equal to 50% of the total amount due. Employees pay their portion through withholding from their weekly paychecks.
The interesting thing to note about FICA withholding is that the money does not go into an investment account that is then used to pay the benefits of the people who pay it. For example, the mythical Social Security trust fund does not really exist. The money employees are paying into Social Security today is not being set aside for them to be paid back in retirement. So what happens to the money?
Current FICA taxes are used to pay the benefits of current recipients. If your grandparents are retired and still alive, your FICA contributions are helping to pay their benefits. Your grandchildren will be contributing to help pay your benefits in the future.
FICA by the Numbers
BenefitMall explains that Medicare taxes make up 2.9% of FICA withholding. The Medicare portion of FICA is taxed at a rate of 2.9% of the employee’s earnings. The employee pays 1.45%; the employer matches that with an identical 1.45%. That means for every $100 a person earns, $2.90 goes toward Medicare.
The Social Security portion of FICA equates to 12.4% of a person’s earnings. Both employer and employee pay 50% of that, or 6.2% each. For every $100 earned, both employer and employee pay $6.20 toward Social Security benefits. That amount goes directly to fund the benefits of senior citizens currently collecting Social Security.
As a side note, self-employed individuals pay both shares of FICA. They pay 15.30% for every $100 earned.
Once again, it is imperative that workers understand where FICA withholdings are going. Far too many people believe that the taxes they pay into the system are being set aside for their exclusive use once they reach retirement age. As such, they feel they have a right to that money.
Demanding a Better Accounting
More than eight years ago it was suggested that requiring people to pay for their healthcare out-of-pocket before being reimbursed would result in a better accounting of how healthcare dollars are spent. It would cause people to shop around for the most cost-effective treatments in order to keep insurance prices in check. Let us assume this thinking is correct. How would a better understanding of FICA withholding affect the average taxpayer?
If people really knew how FICA withholding works, then they might demand a better accounting by the federal government. Perhaps they wouldn’t be so quick to believe in things like the Social Security trust fund. And perhaps they would be more skeptical of tax cutting promises at election time. Wouldn’t that be nice?