What are these FICA taxes taken out of my paycheck and what is the trust fund?

Ralph Estep Jr.:
00:00

Do you ever look at your paycheck and wonder where a chunk of your hard-earned money is going? I know when I first started working, I sure did. Those mysterious FICA taxes can be confusing. Stay tuned to find out exactly what FICA is, where the money goes, and how much you're going to pay over your lifetime.

Ralph Estep Jr.:
00:21

Welcome to the Ask Ralph Show where we tackle your personal finance questions from a Christian perspective. I'm your host, Ralph, and I'm excited to dig into today's topic. Those ambiguous FICA taxes. Whether you're a longtime listener or if this is your first episode, I want to thank you for joining me today. My goal with the show is pretty simple. And that's to provide practical guidance to help you improve your finances while deepening your faith.

Ralph Estep Jr.:
00:47

We got this phone message from a listener. "Hi Ralph, this is Billy calling from Virginia. I just started my first job out of college, and I'm confused about all these taxes coming out of my paycheck. What exactly are FICA taxes anyway? My parents told me it's for Social Security and Medicare, but I really don't understand how those work either. Can you explain it in some simple terms? I really appreciate any advice. Thank you."

Ralph Estep Jr.:
01:13

Hi, Billy. Thanks for the great question. You're definitely not alone in wondering about those mysterious FICA taxes. So let me break it down for you. FICA stands for Federal Insurance Contributions Act. It requires both employees and employers to contribute to the Social Security and Medicare systems. Social Security provides retirement, provides disability, and provides survivor benefits to qualifying workers and families. Medicare helps pay for healthcare costs for those Americans, age 65 and older.

Ralph Estep Jr.:
01:44

As an employee, 7.65% of your paycheck goes to FICA taxes. Your employer matches that contribution. So effectively, 15.3% of your wages in total go to funding Social Security and Medicare. We're going to get in the weeds a little bit, but the social security portion is 6.2% of earnings up to $168,600 in 2024. And that changes every year based on inflation. The Medicare portion is 1.45% on all of your earnings. There is no cap on Medicare.

Ralph Estep Jr.:
02:18

Self-employed individuals pay both halves for a total of, yep, you heard me right. 15.3%. This is what they call those self-employment taxes. Over your working lifetime, the average person will pay around $300,000 into social security and about $150,000 into Medicare through FICA taxes. That may sound like a lot, but remember, these programs support you later in life.

Ralph Estep Jr.:
02:47

Let's consider today's Bible verse. "Carry each other's burdens, and in this way, you'll fulfill the law of Christ." That's from Galatians 6:2. This verse reminds us that programs like Social Security and Medicare are meant to help us carry each other's burdens and care for the elderly and disabled. As Christians, we're called to support the vulnerable members of our society. So now, let's get into the details on Social Security and Medicare and how your FICA taxes fund these programs.

Ralph Estep Jr.:
03:17

Social Security was started 1935 during the great depression to provide a social safety net for elderly and disabled Americans. It's ran by the Social Security Administration and funded by those FICA payroll taxes we've been talking about. When you work and pay Social Security taxes, you earn credits that count towards your eligibility for future benefits. You can earn a maximum of 4 credits per year.

Ralph Estep Jr.:
03:46

Most people need 40 credits or about 10 years of work to qualify for retirement benefits. That's what they call vesting in Social Security. The money you pay into the system doesn't sit in an account with your name on it. Yes. I actually have some older relatives who still think down there in Washington, there's some drawer with their name on it. Nope. Social security operates as a pay as you go system. Taxes from today's workers go to pay benefits for today's retirees.

Ralph Estep Jr.:
04:15

And this worked well for decades when there were many more workers than retirees. But now the U.S. Population is aging rapidly. And by 2035, it's estimated there may not be enough payroll tax revenue coming in to fully fund social security benefits. That's what you often hear when they talk about social security trust fund. This is money the government has borrowed from the social security surplus over the years when there was more people paying in them. We're having an opposite situation now.

Ralph Estep Jr.:
04:44

But even with the trust fund, if no changes are made, Social Security will only have enough revenue to pay 77% of promised benefits starting in 2035. That's a problem. So debates continue in Congress about potential fixes, like raising the retirement age. You know, maybe they make it 72 or 74. Increasing the FICA tax rates. That's what's going to come out of your paycheck or raising the income cap on taxable wages. This is a debate that all of us need to pay attention to and watch because it's going to affect all of us eventually.

Ralph Estep Jr.:
05:18

Well now let's discuss Medicare. This provides health insurance for Americans 65 or older, as well as younger people who may be having disabilities. Medicare has multiple parts. You probably heard these. Part A covers hospital visits, part B covers doctor visits and outpatient care, Part C offers managed care plans and part D covers prescription drugs. Your Medicare taxes go to fund Medicare Part A and Part B. Higher income individuals pay additional premiums for Part B and D.

Ralph Estep Jr.:
05:49

You may have heard me talk about this on the show. It's what's called the IRMAA adjustment. Employers don't directly pay into Medicare like they do with Social Security. But they do withhold Medicare taxes from employees' paychecks. Self-employed people pay the full 2.9% Medicare tax themselves on all of their net earnings.

Ralph Estep Jr.:
06:09

Now Medicare faces some financial challenges too with healthcare costs continuing to rise. But it has a stronger financial outlook than Social Security and it's projected to be able to pay 91% of the costs in 2028 when the hospital insurance trust fund reserves are expected to run out. So in summary, while FICA taxes may feel like a burden, they fund programs that provide vital benefits we'll all need later in life. And they allow us to care for the elderly and disabled members of our communities.

Ralph Estep Jr.:
06:40

All right. Well, let's recap what we covered today. FICA taxes fund Social Security and Medicare. As we said, 7.65% is withheld from your paycheck for FICA and that's matched by your employer. Over your career, you'll pay about $300,000 into Social Security and about 150,000 into Medicare. As we talked about, social security faces a shortfall. Potential fixes are being debated. So you got to pay attention to what they're talking about.

Ralph Estep Jr.:
07:07

And overall, Medicare has been more stable financially but still faces rising healthcare costs. I hope this breakdown helps explain what those mysterious FICA taxes are and about where your money's going. You look at that paycheck and you're wondering what happened. While paying taxes is never fun, remember that these programs provide a safety net that we all agreed contribute to for the good of our communities.

Ralph Estep Jr.:
07:31

Well, visit askralphpodcast.com to join our email list and get a free copy of my book. This is it right here. Mastering your finances. When you join, you also gain access to a community of supportive listeners who are pursuing financial freedom in a thought, faith-filled way. That will save you 10 bucks over the Amazon price just by joining the Ask Ralph community. And as always, if you have any other money questions you're wrestling with, don't hesitate to reach out.

Ralph Estep Jr.:
07:57

I'll see you tomorrow when we tackle the big question of when is the right time to refinance your home. So I'm going to ask you to do me a favor. Share this episode with a friend or family member who might benefit from learning the basics of FICA taxes. The more we can spread this practical financial knowledge, the better off our communities will be.

Ralph Estep Jr.:
08:17

As Proverbs 27:17 says, "As iron sharpens iron, so one person sharpens another." Let's sharpen each other by sharing resources and knowledge that will be uplifting. So as I always say when I close, stay financially savvy, stay tuned for tomorrow's show, and God bless you abundantly.