As we get ready for an electoral, presidential race where we have heard very little so far on proposed policy issues, we heard a whopper of one the other day from our president. Trump said, if re-elected, he’ll get rid of the payroll tax. So, what’s the payroll tax?

 

The payroll tax is a tax withheld from an employee’s salary by an employer who remits it to the government on behalf of the employee. The tax is based on wages, salaries, and tips earned by employees, and is deducted for social security and medicare benefits.

 

The current tax rate for social security is 6.2 percent for the employer, and 6.2 percent for the employee, or 12.4 percent in total., while the current rate for medicare is 1.45 percent for the employer, and 1.45 percent for the employee, or 2.9 percent in total. The Federal Insurance Contributions Act Tax, which comprises social security and medicare taxes is known as FICA. Combined, the FICA tax rate is 15.3 percent of an employee’s salary.

 

So, if we only count the employee’s contribution portion, this would be 7.65 percent. If the payroll tax were to be eliminated on an employee’s annual salary of $50,000, this would amount to, on the one hand, $3,825 extra in the employee’s pocket. On the other hand, it could mean $3,825 a year less per employee in the federal social security fund.

 

But the president says he has a solution for that too! Social security could be paid for, not out of a mandatory fund designated for that purpose but out of the government’s general fund, the same fund that pays for everything else – from defense to food stamps!

 

In fiscal year 2019, federal payroll taxes generated $1.24 trillion in revenue for the federal government, which amounts to 5.9 percent of the nation’s gross domestic product (GDP), or 35.9 percent of overall federal revenues. This means, to pay for current social security and medicare costs, we would need $1.24 trillion from the general fund.

 

If the current U.S. budget is $4.4 trillion, that means we would need to either earn 35.9 percent more in federal revenues or cut the existing budget elsewhere by 35.9 percent.

 

Will U.S. citizens or businesses accept a separate 7.65 percent tax elsewhere to make up this difference? Can the government hope that U.S. Bonds, for example, which now help to fund social security but are now paying a historically low 3 percent return, will somehow go up to generate a 7.65 percent return instead?

 

Is it possible that Congress & the president will readjust the budget every year to make up this 7.65 percent per person difference, knowing that in the wake of this pandemic over the next few years, people will need and use every single dollar they can get their hands on?

So far, the answers to this economic crisis on both sides of the political aisle have been atrocious. The first approach was the one-off $1,200 stimulus check which accounts for just 2.4 percent of the average U.S. person’s annual salary of $50,000. Then, for businesses, there was the poorly administered PPP program, where richer organizations benefited from the program over the average “Mom & Pop” grocery store. Democrats and republicans have proven with these two programs that they do not know how to handle a crisis.

The next proposal is eliminating these payroll taxes. But we are indeed getting desperate if we are to believe that future social security funding can come out of the general fund all for the sake of some immediate, albeit extra money in our pockets.

 

As we get ready to go into our seventh month of this crisis, no one truly has the solution. Using the above $50,000 example for the average U.S. annual salary, this works out at $4,166 per month. Seven months into the crisis, we are looking at an economic loss of close to $30,000 per person for those who have lost their jobs, cannot put food on the table or properly take care of their families, and that’s just on the surface, without taking into account the wider impact of that loss on the economy in terms of reduced spending.

 

So, do we risk our future now by eliminating this payroll tax in the hope that the government will have our backs during retirement? This is a question all people, especially the 30 to 40-year-olds should be asking themselves right now.

 

Professor Anthony Rivieccio, MBA PFA, is the founder and CEO of The Financial Advisors Group, celebrating its 24th year as a fee-only financial planning firm specializing in solving one’s financial problems. Mr. Rivieccio, a recognized financial expert since 1986, has been featured by many national and local media including: Kiplinger’s Personal Finance, The New York Post, News 12 The Bronx, Bloomberg News Radio, BronxNet Television, the Norwood News, The West Side Manhattan Gazette, Labor Press Magazine, Financial Planning Magazine, WINS 1010 Radio, The Co-Op City News, The Bronx News, thisisthebronX.info, The Parkchester Times and The Bronx Chronicle. Mr.  Rivieccio also pens a financial article called “Money Talk”. Anthony is also currently an Adjunct Professor of Business, Finance & Accounting for both, City University of New York & Monroe College, a Private University. You can reach Anthony at 347.575.5045.