How big of a percentage of wages go towards Social Security?
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Critics of the system, such as Nobel Laureate economist Milton Friedman, have said that Social Security redistributes wealth from the poor to the wealthy. Workers must pay 12.4%, including a 6.2% employer contribution, on their wages below the Social Security Wage Base ($102,000 in 2008), but no tax on income in excess of this amount. Therefore, high earners pay a lower percentage of their total income, resulting in a regressive tax. The benefit paid to each worker is also calculated using the wage base on which the tax was paid. Changing the system to tax all earnings without increasing the benefit wage base would result in the system being a progressive tax.
Social Security debate in the United States
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Workers must pay 12.4 percent, including a 6.2 percent employer contribution, on their wages below the Social Security Wage Base ($110,100 in 2012), but no tax on income in excess of this amount. Therefore, high earners pay a lower percentage of their total income because of the income caps; because of this, and the fact there is no tax on unearned income, social security taxes are often viewed as being regressive. However, benefits are adjusted to be significantly more progressive, even when accounting for differences in life expectancy. According to the non-partisan Congressional Budget Office, for people in the bottom fifth of the earnings distribution, the ratio of benefits to taxes is almost three times as high as it is for those in the top fifth.
Despite its regressive tax rate, Social Security benefits are calculated using a progressive benefit formula that replaces a much higher percentage of low-income workers' pre-retirement income than that of higher-income workers (although these low-income workers pay a higher percentage of their pre-retirement income). Supporters of the current system also point to numerous studies that show that, relative to high-income workers, Social Security disability and survivor benefits paid on behalf of low-income workers more than offset any retirement benefits that may be lost because of shorter life expectancy (this offset would only apply at a population level). Other research asserts that survivor benefits, allegedly an offset, actually exacerbate the problem because survivor benefits are denied to single individuals, including widow(er)s married fewer than nine months (except in certain situations), divorced widow(er)s married fewer than 10 years, and co-habiting or same-sex couples, unless they are legally married in their state of residence. Unmarried individuals and minorities tend to be less wealthy.
Social Security (United States)
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The employer is also liable for 6.2% Social Security and 1.45% Medicare taxes, making the total Social Security tax 12.4% of wages and the total Medicare tax 2.9%. (Self-employed people are responsible for the entire FICA percentage of 15.3% (= 12.4% + 2.9%), since they are in a sense both the employer and the employed; see the section on self-employed people for more details.)
Federal Insurance Contributions Act tax
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In Brazil employers are required to withhold 11% of the employee's wages for Social Security and a certain percentage as Income Tax (according to the applicable tax bracket). The employer is required to contribute an additional 20% of the total payroll value to the Social Security system. Depending on the company's main activity, the employer must also contribute to federally funded insurance and educational programs.
Payroll tax
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In 2018, the Social Security Wage Base was $128,400 and the Social Security tax rate was 6.20% paid by the employee and 6.20% paid by the employer. A person with $10,000 of gross income had $620.00 withheld as Social Security tax from his check and the employer sent an additional $620.00. A person with $130,000 of gross income in 2017 incurred Social Security tax of $7,886.40 (resulting in an effective rate of approximately 6.07% - the rate was lower because the income was more than the 2017 "wage base", see below), with $7,886.40 paid by the employer. A person who earned a million dollars in wages paid the same $7,886.40 in Social Security tax (resulting in an effective rate of approximately 0.79%), with equivalent employer matching. In the cases of the $130k and $1m earners, each paid the same amount into the social security system, and both will take the same out of the social security system.
Social Security Wage Base
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To calculate the total benefits a retiree is eligible for, the average indexed monthly salary (AIME) is then divided into three separate salary brackets—each multiplied by a different benefit percentage. The benefits receivable (the so-called Primary Insurance Amount, PIA) are the sum of the salary in each bracket times the benefit percentages that apply to each bracket. The benefit percentages are set by Congress and so can easily change in the future. The "bendpoints", where the brackets change, are adjusted for inflation each year by Social Security. For example, in 2013 the first bracket runs from $1 to $791/month and is multiplied by the benefit percentage of 90%, the second salary bracket extends from $791 to $4,781/month is multiplied by 32%, the third salary bracket of more than $4,781/month is multiplied by 15%. Any higher incomes than the ceiling income are not FICA covered and are not considered in the benefits calculation or in determining the average indexed monthly salary, AIME. At full retirement age the projected retirement income amount (PIA) is the sum of these three brackets of income multiplied by the appropriate benefit percentages—90%, 32% and 15%. Unlike income tax brackets, the Social Security benefits are heavily biased towards lower salaried workers. Social Security has always been primarily a retirement, disability and spousal insurance policy for low wage workers and a very poor retirement plan for higher salaried workers who hopefully have a supplemental retirement plan unless they want to live on significantly less after retirement than they used to earn.
Social Security (United States)
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When an employee works for several different companies during a tax year, his or her Social Security deductions could exceed the cap, because each employer may not know how much the employee has already paid in Social Security tax in other jobs. The Social Security tax coverage will be calculated on his or her personal return, and any excess is applied towards his or her Federal taxes. For example, in 2017 an employee works two jobs (either concurrently or consecutively) paying $70,000 each. Since each employer calculates the social security taxes independently, each employer will withhold 6.2% of the $70,000 employee’s salary, or $4,340, for a grand total of $8,680 -- which exceeds the cap of $7,886.40 by $739.60. The over-payment would be entered on the applicable line of Form 1040 and, assuming the employee did not owe any other Federal taxes, would be refunded to the employee. The employers who each paid $4,340 will not get a refund, since they are not aware that the employee overpaid in aggregate for the year. The government keeps the $818.40 overage. Even if the employers become aware of the overpayment, there is no method to claim the overpayment.
Social Security Wage Base
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Federal social insurance taxes are imposed equally on employers and employees, consisting of a tax of 6.2% of wages up to an annual wage maximum ($118,500 in 2015) for Social Security plus a tax of 1.45% of total wages for Medicare. For 2011, the employee's contribution was reduced to 4.2%, while the employer's portion remained at 6.2%. To the extent an employee's portion of the 6.2% tax exceeds the maximum by reason of multiple employers (each of whom will collect up to the annual wage maximum), the employee is entitled to a refundable tax credit upon filing an income tax return for the year.
Employers are subject to unemployment taxes by the federal and all state governments. The tax is a percentage of taxable wages with a cap. The tax rate and cap vary by jurisdiction and by employer's industry and experience rating. For 2009, the typical maximum tax per employee was under $1,000. Some states also impose unemployment, disability insurance, or similar taxes on employees.
Taxation in the United States
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Since 1990, the employee's share of the Social Security portion of the FICA tax has been 6.2% of gross compensation up to a limit that adjusts with inflation. The taxation limit in 2017 was $127,200 of gross compensation, resulting in a maximum Social Security tax for 2017 of $7,886.40. This limit, known as the Social Security Wage Base, goes up each year based on average national wages and, in general, at a faster rate than the Consumer Price Index (CPI-U). The employee's share of the Medicare portion of the tax is 1.45% of wages, with no limit on the amount of wages subject to the Medicare portion of the tax. Because some payroll compensation may be subject to federal and state income tax withholding in addition to Social Security tax withholding and Medicare tax withholding, the Social Security and Medicare taxes often account for only a portion of the total an employee pays.
Federal Insurance Contributions Act tax
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Social Security tax is withheld from wages at a flat rate of 6.2% (4.2% for 2011 and 2012). Wages paid above a fixed amount each year by any one employee are not subject to Social Security tax. For 2015, this wage maximum is $118,500. Medicare tax of 1.45% is withheld from wages, with no maximum. Employers are required to pay an additional equal amount of Medicare taxes, and a 6.2% rate of Social Security taxes.
Tax withholding in the United States