Over the past few months, many people have been worried about the future of Social Security. There are concerns that the Social Security trust fund might run out by 2035. Social Security is supported by payroll taxes, which both employers and employees pay. This money goes towards retirement, disability, and survivorship benefits for millions of Americans. Recently, the Biden administration announced a significant change to address these concerns.
The Government’s Major Change to Save Social Security
President Joe Biden wants to raise taxes on wealthy individuals to fund Social Security. Unlike former President Donald Trump, who wanted to reduce Social Security, Biden believes that the wealthy should contribute more.
Currently, Social Security is funded by a 6% tax on income for those earning less than $170,000 per year. Biden is frustrated that the richest people pay a smaller portion of their income due to the $168,600 income cap. The Social Security trustees estimate that by around 2035, the funds will only be able to pay 83% of the scheduled benefits, so changes are necessary to stabilize the program.
How Do Social Security Taxes Work?
Social Security taxes are part of the Old Age, Survivors, and Disability Insurance (OASDI) program. This program provides retirement, disability, and survivorship payments to millions of Americans. Employers deduct this tax from employees’ paychecks and send it to the government. The money collected is used to pay current beneficiaries.
Social Security tax also supports survivorship benefits for dependent children and surviving spouses in case of a parent’s or spouse’s death. The current Social Security tax rate is 12.4%, with employers and employees each paying 6.2%. This tax applies to all forms of income, including bonuses, wages, and salaries.
How Do Social Security Taxes Work for the Self-Employed?
Self-employed individuals also pay Social Security taxes on their net income. Since they are considered both employer and employee by the IRS, they pay the full 12.4% tax. Additionally, they must pay Medicare tax, making the total self-employment tax 15.3% in 2024 (12.4% Social Security tax plus 2.9% Medicare tax). This tax is only applied to net business earnings or 92.35% of them.
The Importance of Taxation in the US
Social Security contributions are a crucial part of fiscal policy and a significant source of funding. Most countries have social protection expenses, funded by taxes on employees, employers, and self-employed individuals. When a state collects general income tax, it must consider how Social Security taxes interact with other taxes.
International agreements can reduce double taxation but rarely eliminate it. A state might tax export transactions higher if it relies more on Social Security taxes than income taxes. States must decide whether to use direct or indirect taxes to cover costs, and this decision affects overall tax rates and state spending.
Frequently Asked Questions (FAQs)
1. What is Social Security?
Social Security is a government program that provides retirement, disability, and survivorship benefits to eligible Americans.
2. How is Social Security funded?
Social Security is funded through payroll taxes paid by employers and employees, as well as self-employment taxes.
3. What changes has President Biden proposed for Social Security?
President Biden has proposed raising taxes on wealthy individuals to ensure they contribute more to the Social Security program.
4. What is the current Social Security tax rate?
The current Social Security tax rate is 12.4%, with employers and employees each paying 6.2%.
5. How do self-employed individuals pay Social Security taxes?
Self-employed individuals pay a total self-employment tax of 15.3%, which includes both Social Security and Medicare taxes.
The future of Social Security is a critical issue for millions of Americans who rely on it for their retirement, disability, and survivorship benefits. The Biden administration’s proposal to increase taxes on the wealthy aims to stabilize the Social Security system and ensure its long-term viability.
Understanding how Social Security taxes work and their importance to the fiscal policy of the United States helps highlight why these changes are necessary. As these discussions continue, staying informed about potential changes and their impacts on the Social Security system is essential for everyone.