It is regrettable that many politicians and economists fail to present our $34 trillion debt in a more straightforward manner. However, I will provide some clarity on the fundamental mathematics involved. A solid understanding of this math can help predict potential future outcomes. With the prospect of another four years of Bidenomics, you may come to believe that social security taxes will be a permanent fixture. Here’s the reasoning behind this.
If we consider the government as a business (albeit an inefficient one), it generates revenue through three primary channels:
- Personal Income Tax (47% of U.S. revenue)
- Payroll Tax (Social Security and Medicare) (37% of U.S. revenue)
- Corporate Income Tax (9.5% of U.S. revenue)
On the expenditure side, we face an annual fiscal deficit of approximately $1.8 trillion. The four largest expenses are as follows:
- Medicare/Medicaid (24% of spending)
- Social Security (22% of spending)
- Defense (13% of spending)
- Net Interest on the Debt (11% of spending)
How can you address this situation? What steps can you take to potentially achieve a balanced budget? The straightforward approach involves either reducing expenses, increasing revenue, or implementing a combination of both strategies.
According to the latest report from The Social Security Board of Trustees, it is projected that, under current legislation, the Social Security Trust Funds will be exhausted by 2041. For those unfamiliar with how the Social Security (FICA) Tax operates today, here is a brief overview:
- As an employee, you contribute 6.2% of each paycheck to Social Security until you reach the FICA wage base cap, which is set at $168,600 for 2024.
- Your employer matches this contribution with an additional 6.2%, also subject to the same cap.
- If you are self-employed, you are responsible for paying both portions of the Social Security tax, although you can claim a small tax deduction when filing your taxes.
The current administration announced in 2023 its intention to establish payroll taxes as a ‘perpetuity’ tax for individuals earning over $400,000. This proposal implies that both employees and employers would be obligated to pay an additional 6.2% on every dollar earned beyond that threshold. This approach subtly increases corporate taxation while simultaneously imposing a personal tax burden on hardworking Americans.
The “donut hole”—the income range between $168,600 and $400,000—is relatively narrow. Consequently, it is not far-fetched for the government, under the Biden administration’s economic policies, to consider making Social Security a perpetuity tax.
With nearly half of American households not contributing to federal taxes, it is unsurprising that the recurring solution is to impose higher taxes on the wealthy. If 50% of the population is exempt from federal taxes, the burden inevitably falls on those who are earning more.
Corporations account for only 9.5% of the total revenue generated. While increasing their tax rates could provide some relief, it pales in comparison to the payroll taxes collected nationwide. Therefore, it is important to be aware that a perpetuity tax on Social Security may emerge as a significant focus in the coming four years, impacting both employees and employers.
As the national debt continues to rise, currently at $34 trillion, the potential for a 6.2% tax on every dollar earned looms closer.
