🪄 529 goes stealth

Most Taxes Have Fallen for Decades, but American Workers Are Paying More for One Tax — And Could Soon Pay Even More

For the last 70 years, taxes have fallen in the US (opens in a new tab)… but surprise: wage workers are almost single-handedly propping up one of the most important exceptions to the rule. And if history is any indication (opens in a new tab), they might soon see a bigger cut come out of their paychecks to keep it going.

The payroll exception: When seniors retire, they can count on Social Security and Medicare. Both are entitlement programs designed with good intentions — to help seniors afford a decent standard of living once they leave the workforce, financed by payroll taxes. But as the programs have grown to cover more Americans, the share of your paycheck going to Federal Insurance Contributions Act (FICA) taxes has risen significantly. There are two major components.

• When Social Security was started in 1937, it was financed by a 1% tax on employees and a 1% tax on employers, with the rate raised 5x through 1965 as coverage expanded to more workers and disability insurance was introduced.

• By 1966, Medicare was added to the FICA tax, bringing the total cost of these programs to 4.2%, which climbed further to 7.05% in 1985, 7.51% in 1988, and 7.65% in 1990.

• Today, the combined 15.3% FICA tax generates $1.32T in revenue and covers nearly 81% of the programs’ total expenditures.

Even Your Fair Share Isn’t Enough

The FICA tax has not risen since 1990, but it’s increased sevenfold since the Social Security tax began. So by design, many retirees are now taking more out of the system than they put in (opens in a new tab). Costs currently exceed income, meaning the programs are drawing down reserves. That’s a problem that will need to be resolved soon.

• The US Government says that the Social Security trust fund has enough funding to pay benefits until Q4 2032 — after that, without changes, it could cover only 78% (opens in a new tab) of benefits.
• Congress has had to keep the system sustainable with broad changes — raising FICA taxes, broadening the wage base, and bumping the retirement age, among other things.

What does fixing the problem look like? Congress could fund Social Security indefinitely by copying what it did for Medicare — it removed the cap on Medicare-taxable wages in 1994 and added a 0.9% surcharge on higher earners in 2013. However, to prevent the further creep of FICA taxes, the government will likely need to look beyond payroll to fund other programs Americans rely on, like Medicare Parts B and D, Supplemental Security Income (SSI), and more.