In the first video on Social Security,
I keep talking about how the tax that you pay for Social
Security is called the FICA tax.
What I want to do in this video is, one,
let you know what FICA actually stands for, and then think
a little bit about how it is actually calculated.
So first, what does it stand for?
Literally, it just stands for Federal Insurance Contributions
Act.
That's the acronym.
And so it'd be FICA, and then some people
will call it FICA tax.
And this isn't just to support Social Security,
or to be technically correct, to support the old age
survivors and disability insurance.
Part of FICA tax is for that, and part is for Medicare.
And so to make things clear, the part
that is Social Security, or what we associate
as Social Security, which is really the OASDI--
did I get that right?
OASDI.
So part of it is for Social Security,
and then that part is 12.4% of the gross salary.
But half of this is paid for by the employer,
half is paid by the employee.
And we'll do a calculation in a second.
So 6.2% and 6.2%.
The part that's paid by the employer, that's
part of the payroll tax, stuff that the employer
pays above and beyond the gross income
that they're giving to the employee.
And we'll do that calculation in a second.
The other thing that FICA tax is used for is Medicare.
And this is for a total amount of 2.9% of an employee's
gross salary, or 1.45% from the employer as part of the payroll
tax and 1.45% from the employee.
And if you add these two things up,
you get 15.3% total FICA tax.
15.3% where, once again, half is paid by the employer and half
is paid by the employee.
Now, let's just do a calculation so that it makes a little bit
more tangible sense of what I'm even
talking about with this FICA tax.
So let's imagine that you make $100,000 a year.
And it's a nice number, because it makes the math easy.
Then your employer-- employer, employee,
let me write it like this.
Employer, employee.
So for Social Security, your employer
will contribute 6.2% of this.
So above and beyond paying the $100,000 gross salary,
they will also pay 6.2%, or $6,200.
And the employee will also pay $6,200.
And that will be deducted from their paycheck,
so what they get will be net of the $6,200.
And then for Medicare-- let me do that in pink.
Then for Medicare, the employer will
contribute $1,450, once again above
and beyond the gross salary of $100,000.
And the employee will pay $1,450 out of their gross salary.
So the total amount that is paid by the employer
is $7,650 in payroll tax for this one employee.
And the total amount by the employee
is the exact same amount, $7,650.
So just to be clear, if you wanted to hire an employee
and pay them $100,000 in gross salary,
you actually would have to set aside $100,000 and the $7,650.
So the employer-- the total that the employer's
paying-- or let me just think of it this way.
The total that the employer has to set aside,
if you include the salary, is going
to be $107,650 so they can cover the gross salary
plus this payroll tax over here.
The net that the employee is getting--
and actually, this isn't even the net.
I shouldn't even call it the net.
The employee, after paying FICA taxes,
is going to be the $100,000 minus the $7,650.
But I won't even write that number down.
I mean, what is that?
That's $92,350, because that's before
paying just the traditional federal income
tax and the traditional state income taxes.
So that's going to cut it down a good bit.
So the employee's going to take home probably
on the order of $60,000 to $70,000,
so above and beyond this thing right here.
So even though the employer's paying this much,
the employee's getting a lot less
in terms of what they get to take home.
Now, one thing that I think that is worth
mentioning is unlike traditional federal income
tax-- and traditional federal income tax
the first several 10s of thousands of dollars you make
are not taxed.
And then as you go up the brackets,
each incremental dollar, as you enter one bracket or another,
you start to pay a higher percentage on those.
The FICA tax is actually very different.
Some people would even call it a regressive income tax.
And that's because you only pay the FICA
tax on the first $106,000-- or at least this
is the numbers in 2011.
You only paid on the first $106,800.
So someone who makes $200,000 will pay the same FICA tax
as someone who makes $106,800.
So you only pay on the percentage below that.
And the reason why is that the person making the $200,000
will get the exact same benefits, as well,
as the person who pays $106,800.
And this number, essentially, they try to index it roughly
to inflation.
So it will go up over time.
But to some degree, someone who makes, let's say-- well,
someone who makes below this threshold
is going to pay this percentage.
Between them and their employers,
they're going to pay this percentage of their income.
Well, someone who makes much more than this
will actually pay a smaller percentage of their income,
but they'll end up getting the same benefits.
And so that's one reason why it's considered regressive,
is that as you make more money, you're
actually paying a smaller percentage
of your income on FICA tax.
And the other reason why it's considered regressive
is actually on the benefit side, because obviously someone
who-- if you have two people receiving Social Security
benefits-- so you have this person-- so this
is when they turn 65.
Let me put it this way.
So let's say that you have two people.
They work their whole lives.
And let's say they both retire at 65,
although that retirement age is increasing.
It's slowly being indexed up.
And then they retire.
It's known that the wealthier people or wealthier--
and there's also demographics based on race and things
like that.
But it's known that wealthier people actually live longer,
so they actually get benefits for a longer period of time.
So they're actually able to get their benefits for longer.
So it depends where you fall into it.
Likely that even though there's this cap,
someone higher up the income chain also probably
did pay more into it.
But they're also getting a bigger check
for paying more into it.
The check that you eventually get
is based, to some degree, on what level of FICA tax
you were paying.
And they're very well likely to be
able to collect these payments for longer than someone who
maybe doesn't have quite the same, I guess, quality of life
and doesn't actually live as long.