This time each year, as we all go through the ritual torture of filling out our income-tax forms, we hear a crescendo of complaints from friends, neighbors and co-workers about how unfair, complex, onerous and contradictory the tax code is - and they're right. However, what we lack is an annual day to lament the burden of FICA taxes that come out of our paychecks every payday, depleting household savings, diminishing wealth and leaving so many totally dependant upon the federal government for retirement income.
Since the inception of Social Security, payroll tax rates have skyrocketed. The tax originally stood at 2 percent. Today, the payroll tax has reached 15.3 percent. In addition, this 15.3 percent rate applies to every tax bracket, regardless of income, making it regressive, as well. As a result, for a large number of lower-income workers, many of whom have essentially been removed from the income-tax rolls, FICA taxes loom as the greatest obstacle to personal wealth creation. Today FICA taxes contribute 33.2 percent of all federal revenues, bringing in $648 billion to the Treasury in 2003.
With the recent release of the 2004 Annual Trustees' Report on Social Security, much of the debate has centered on the long-term financing of the system and the consequential effects it will have on our payroll taxes and retirement benefits. Numerous solutions have been put on the table, but most do not resolve the structural problems inherent in the system.
Recently some Democrats have called for an immediate FICA tax cut or a payroll tax holiday. While this proposal may resonate politically, it's disingenuous if we put their rhetoric into historical context. With a financial crisis looming, any immediate cut in payroll taxes that is not coupled with substantial reform of the current pay-as-you-go system would jeopardize the benefits of current retirees, leaving current workers and future workers with even higher taxes in the long run.
Their proposal is disingenuous because these same politicians could have enacted these "reforms" during the 1980s or early 1990s instead of raising payroll taxes, yet again, in an effort to make the system "solvent." What's worse, the $738 billion in surpluses (excluding interest) generated from the tax increases since 1984 and increased taxes on Social Security benefits enacted in 1993 have been wasted on other government programs instead of utilizing these proceeds to fund the transition to a fully funded personal retirement accounts program.