History of the Federal Income Contribution Act (FICA)
You have probably noticed those deductions on your paycheck stub marked “FICA.” These are the payroll taxes that fund Social Security and Medicare Part A hospitalization benefits. FICA deductions are the lifeblood of these programs. They’re the reason we call Social Security and Medicare “earned benefits” — because Americans make payroll contributions throughout their working lives to be eligible for financial and health benefits for themselves and their families upon retirement, disability or death. All wage earners contribute a 6.2% payroll tax for Social Security with a 6.2% employer match. There’s an additional 1.45% payroll contribution for Medicare by both employers and employees. Self-employed individuals pay the full 15.3 percent.
FICA stands for Federal Insurance Contribution Act, a 1935 law enacted in conjunction with Social Security to establish the program’s funding mechanism. The federal government has been collecting FICA payroll taxes since 1937. President Franklin Roosevelt, who signed Social Security into law, insisted that the program be self-funded and not dependent on general federal revenue. That way, Social Security truly would belong to the workers who pay into it.
President Roosevelt famously said of the FICA taxes:
“We put those payroll contributions there so as to give the contributors a legal, moral, and political right to collect their pensions… With those taxes in there, no damn politician can ever scrap my Social Security program.”
The Medicare payroll tax was added when President Lyndon Johnson signed the landmark seniors’ health security program into law in 1965. Over the years, Congress has adjusted FICA rates to account for demographic changes in America’s workforce and senior population.
In 2019, the federal government collected more than $900 billion in FICA payroll taxes. Any FICA revenues not needed to pay current benefits remain in the Social Security trust fund and are invested in special-issue Treasury securities guaranteed by the U.S. government, with principal and interest returned to the program. (Interest earnings in 2019 totaled $81 billion.) The Trust Fund balance is drawn down to offset any loss of FICA tax revenue in order to pay promised benefits. At the end of last year, the Social Security trust fund had a balance of $2.9 trillion – and is projected to help keep Social Security solvent until 2035.
Social Security payroll contributions are currently capped at $137,700 in annual income, meaning that any wages above that cap are exempt. Growing income inequality over the past few decades has increased the amount of income not subject to payroll contributions. As the years go by, high earners have been contributing less of their income to the system. In fact, people earning $1 million or more annually stop paying into Social Security in February, while most other workers contribute for the entire calendar year.
Because Social Security depends on FICA payroll taxes for most of its revenue, it’s important that this vital funding stream not be diverted for other purposes. Unfortunately, there are proposals from the White House and some in Congress that would misuse payroll taxes for programs unrelated to Social Security. President Trump has repeatedly called for eliminating payroll taxes as a means of stimulating the economy during the Coronavirus pandemic. Recently, White House advisors considered a proposal to provide workers with loans against their future Social Security benefits. In 2018, Ivanka Trump, Senator Marco Rubio and others advocated a family leave program where workers would forfeit some of their much-needed retirement benefits if they wanted paid time off to care for children or other loved ones.
Diverting FICA payroll taxes for other uses threatens the future solvency of Social Security at a time when these programs need more, not less revenue. It also undercuts the “earned benefit” nature of Social Security, even if payroll tax contributions are backfilled with general federal revenues. Reducing or eliminating payroll taxes for unrelated purposes – even temporarily – paves the way for other proposals which could dismantle our successful social insurance programs. Protecting the FICA revenue stream preserves workers’ “legal, moral, and political right” to fully collect their earned benefits.