The Big Bite from Your Paycheck 

09/13/2010 10:54 am EST


Terry Savage

Author, The Savage Truth on Money

Take a closer look at the “bottom line” on your paycheck. As you’ve long ago learned, there’s a big difference between what you officially earn and what you take home.

For most workers, the largest deduction is for FICA, although you may also see deductions for health insurance or retirement plan contributions. 

(By the way, do you know what the initials FICA stand for? If not, the answer is at the bottom of this column, and it might surprise you!)
FICA is the deduction for Social Security (old age, survivors’ and disability) and Medicare. It consumes the first 15.3% of your earnings. That 15.3% is split down the middle between your employer and your wallet.

But since the employer must pay, this is money that might otherwise been available to increase your salary. 

The FICA tax started in 1937, when Social Security was enacted. Back in those innocent days, the rate was 2% and the maximum tax base was only $3,000. The rate increased steadily until the 1960s, when it jumped to 7.25%, with a maximum tax base of $4,800. In 1966, the relatively small Medicare tax of 0.35% was first added. (If you want to see the entire history of how FICA grew into such a monster, click here.

But even the figures for 1972 seem nostalgically low, when compared to 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% on a tax base of $51,300 in 1990. 

In the next 20 years, the rate of 15.3% has remained the same, but the tax base has doubled to $106,800 in 2009 and 2010. That means more and more money coming out of all our pockets.

Yes, inflation has cut into our purchasing power. 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.

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, the growing surpluses in the Social Security “trust fund” were merged with the growing deficits in the US government’s annual budget ever year.

And now, even with the “surplus” Social Security trust fund, we’re going to run an annual Federal budget deficit this year estimated at $1.3 trillion!

So, where did all that FICA money go? Down the drain of federal spending on everything from wars to bank bailouts to stimulus programs. It’s certainly not sitting in an account waiting to pay the retirement benefits that you in part have paid for.

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 some younger baby boomers, who contributed all their working lives, may see only a modest stipend from Social Security.

Yet, for many, it’s the biggest deduction on your paycheck every week, but more and more Americans think it’s in jeopardy. So, to protect yourself, you should try to match that FICA deduction with your contribution to your employer’s 40l(k) or 403(b) plan. 

Sure, the stock market is scary at times, but it has proven a winner over the long run. Compare that with the guaranteed loss of value in your FICA deduction. At least with your 401(k), you’re in control.

PS. FICA stands 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—and the federal government.

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