To save Social Security, overhaul payroll tax system — now

As a practicing CPA for almost 40 years, I have always done what I can to help individuals and businesses navigate ongoing changes in tax laws to mitigate their tax obligations. With that in mind, I am generally opposed to the Biden tax proposals that will raise income and capital gain rates. However, there is one tax increase that needs to be implemented immediately. As one of the 70 million baby boomers who expect to receive a Social Security check without interruption, I believe the Biden administration proposal to replenish the Social Security System does not go far enough and

Michael Rosedale, CPA, is the program director and co-founder of The National Association of Registered Social Security Analysts (NARSSA). He is also the founder of Cpadirectory.com and partner at Rosedale, Drapala, and Sforza on Long Island. something needs to be done soon.

The Social Security Old Age and Survivor Insurance (OASI) Trust Fund is in jeopardy of depletion much earlier than expected. The Board of Trustees’ annual report released in April 2020 indicated that OASI funds would run out by the year 2034 if nothing changed. However, things have changed drastically.

The projections and analysis in that report did not reflect the impact of the COVID -19 pandemic on Social Security. The drop in employment this past year must have had a detrimental effect on the longevity of funding the Social Security Trust Fund. When individuals

collect unemployment checks, they are not paying payroll taxes.

In addition, payment of the employer portion of FICA (Federal Insurance Contributions Act) taxes has been compromised with the modification of eligibility rules for what is called the Employee Retention Credit. To encourage employers to retain employees during the pandemic, the Employee Retention Credit reimburses an employer for a portion of FICA taxes paid into the system.

Under current law, the Social Security program is funded under FICA, which requires both employees and employers to each pay a fixed-rate payroll tax of 6.2 percent of every dollar in wages into the Social Security system, up to the annual limit; 5.015 percent is for Old Age and Survivor Insurance and 1.185 percent is for Disability Insurance. The annual FICA limit for each employee in 2021 is $142,800. Self-employed individuals pay both the employer and employee contribution for a combined Social Security payroll tax of 12.4 percent.

FICA taxes are nonrefundable payroll taxes and are often mistaken for just another income tax. Despite what many individuals think, the amount of FICA taxes paid by a worker is not being saved in a separate account to fund their individual future retirement benefit. Rather, FICA taxes paid by current workers are funding benefits for current retirees.

To save Social Security, the Biden administration is proposing to reinstate the FICA tax on all workers’ earnings more than $400,000. In other words, between the current FICA limit of $142,800 and $400,000, there would be no additional FICA tax. On all earnings over $400,000, the payroll tax would be imposed. Unfortunately, the number of workers in the U.S whose earnings exceed $400,000 is relatively small, and for this reason it is estimated the longevity of the system will only be increased by six years.

What is needed immediately is a drastic overhaul of the payroll tax system. The FICA rate must be increased and the “donut hole” between the annual FICA limit and the $400,000 needs to be eliminated, or at the very least reduced to $300,000.

In seven years, one-fifth of the United States will be eligible for Social Security benefits. The baby boomers have done their share of paying into the system. We need bipartisan support now for a bill that deals with this issue of funding America’s retirement.