Over the past few months, millions of beneficiaries have raised concerns about the future of the Social Security system and their monthly benefits, since there is a possibility that the Social Security trust fund will be depleted by 2035. Employers and employees are required to pay Social Security taxes through payroll taxes to support the U.S. Social Security program. In simple words, millions of Americans receive SSA retirement, disability, and survivorship benefits each year thanks to the payroll taxes recollected each year. Due to recent concerns, the Biden administration announced a major change to try to counteract this potentially unstable situation.
The Government’s major change to save the Social Security system
In contrast to former President Donald Trump, who wished to reduce Social Security, President Joe Biden recently stated that he wants to raise taxes on the affluent to pay for Social Security. As Biden highlighted, making the ultra-wealthy start contributing what they should. As of right now, the SS program is funded by 6% of the income of each person earning less than $170,000 each year.
Furthermore, Biden seems to be upset by the fact that the wealthiest wind up contributing a smaller portion of their total income to the program due to the $168,600 income cap. Social Security must be stabilized. The trustees estimate that sometime around 2035, the combined Social Security and Disability Insurance trust funds will only be sufficient to pay 83% of scheduled payments.
How do Social Security taxes work?
The Social Security tax, a self-employment tax, is part of the Old Age, Survivors, and Disability Insurance (OASDI) program, which pays retirement, disability, and survivorship payments to millions of Americans each year. Employers often deduct this tax from their employee’s paychecks and pay it to the government. The funds raised are used to pay current elderly individuals on a “pay-as-you-go” basis rather than being placed in a trust for specific employees.
In addition, Social Security tax revenue is gathered to assist those who qualify for survivorship benefits, which are disbursed to dependent children in the event of a parent’s death or to a surviving spouse upon the death of the latter. The SS tax rate is 12.4% as of 2024. Employers pay half of the tax, or 6.2%, while employees pay the remaining 6.2%. The rate of SS taxation is applied to all forms of income received by workers, such as bonuses, wages, and salaries.
How do Social Security taxes work for the self-employed?
Up to the above income thresholds, Social Security taxes are also levied on the net income of independent contractors. Self-employed individuals are required to pay the full 12.4% tax because they are considered both an employer and an employee by the Internal Revenue Service (IRS). Moreover, the Medicare and SS taxes combine to form the self-employment tax. The self-employment tax is projected to be 15.3% in 2024 (12.4% Social Security tax plus 2.9% Medicare tax). The tax only applies to net business earnings or 92.35% of them.
The importance of taxation in the US
An important source of financing and a key component of fiscal policy are Social Security contributions. All but the least developed or least interventionist countries have social protection expenditures, whether or not they levy contributions. A state that pays social spending through taxes on employees, employers, and self-employed persons is committed to high-income taxes. When a state intends to collect a general income tax, it must analyze the interaction of the two taxes and their combined impact.
International agreements can reduce double-income taxation, but they rarely reduce taxes. This could cause a state to tax export transactions more highly if it collects SS costs through high Social Security taxes rather than income taxes. Conversely, a state that pays the majority of its costs from general revenue must determine whether to levy direct or indirect taxes. If the expense is mostly passed to income tax, tax rates rise, driving down state spending. If indirect taxes are adopted, there may be difficulties in levying them, such as imposing a high value-added tax on all individuals who benefit from social spending.
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