Social Security tax, one part of the Federal Insurance Contributions Act (FICA) tax, is a payroll tax collected to fund the Social Security program, providing retirement, disability, and survivor benefits. (The other part is the hospital insurance tax known as the Medicare tax.)
It’s levied on both employees and employers, typically at 12.4% of earned income, with 6.2% paid by employers and 6.2% paid by employees (self-employed people pay the full 12.4%).
The funds are credited to the Social Security trust funds, managed by the government, and distributed to eligible beneficiaries based on specific criteria.
Why is the social security tax important?
Social security tax plays a critical role in financing the Social Security program, providing benefits to retired individuals, disabled individuals, and their dependents. These programs are essential as they benefit the public in many ways.
- Poverty Reduction: By providing a safety net, it helps reduce poverty rates, especially among the elderly and disabled populations.
- Inter-generational Equity: The tax system ensures current workers contribute to support retirees, maintaining fairness and sustainability.
- Economic Stability: Social Security benefits inject funds into the economy, supporting consumer spending and overall economic stability.
- Independence and Dignity: Social Security benefits allow individuals to maintain independence and dignity in their later years, reducing reliance on family or government assistance.
- Social Cohesion: By supporting vulnerable populations, it fosters a sense of social responsibility and solidarity within society.
- Public Health: Access to consistent income through Social Security benefits can positively impact overall health outcomes by reducing stress and financial strain.
How does the social security tax benefit employees?
The Social Security benefits employees by providing financial security, protection against life’s uncertainties, and a foundation for long-term financial stability. They can benefit in the same way that the public benefit, as the people who pay into the system are also the beneficiaries of the Social Security Fund.
Let’s review those benefits.
- Retirement Income: Employees contribute to Social Security throughout their working years, which entitles them to receive retirement benefits based on their earnings history upon reaching eligibility age.
- Disability Insurance: In the event of a short or long term disabling condition that prevents them from working, employees are usually eligible for Social Security disability benefits..
- Survivor Benefits: Social Security provides benefits to the surviving spouses and dependents of deceased workers, ensuring financial stability for their families in times of loss.
- Safety Net: Social Security serves as a safety net, offering financial protection against unforeseen circumstances such as disability, illness, or premature death, reducing the risk of financial hardship for employees and their families.
- Long-Term Financial Planning: Contributions to Social Security encourage employees to engage in long-term financial planning for retirement, providing a reliable source of income in later years.
Paying social security tax also counts towards an employee’s eligibility for Medicare, a federal health insurance program that covers individuals over the age of 65 and those with certain disabilities. This helps offset healthcare costs for retirees.