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August 2018 Budget Commentary

The Case of the Missing FICA

Long-time readers will know that the subject of Social Security is near and dear to the heart of this commentary—perhaps because it’s one of the government programs we stand to benefit directly from.  We have often opined that the “crisis” facing Social Security is overblown and the deficits arising from the program in future years are dwarfed by those emanating from the rest of the budget.  This misconception is abetted by the peculiar accounting for Social Security, which involves a “trust fund” consisting of nothing more than IOMe’s, and a “trust fund” balance that is simply a reflection of excess tax paid into the system plus the accrued interest on that amount. 

Even the direst critics of Social Security admit that the depletion of the trust fund is projected to be at least a decade away, and for now the fund is still in its accumulation phase.  And since aggregate wages and salaries have been growing thanks to more jobs and higher pay, one might expect FICA contributions to be rising as well.  However, as you can see in the chart below, the last six months have seen a leveling off and even a drop in receipts.

Flat and falling FICA contributions usually occur only during recessions—so what gives? 

Most of us would reasonably assume that the FICA deduction from our paychecks goes directly to the Social Security system—after all, those funds are supposed to be separate from the rest of the budget.  This is not, however, the way that it happens.  Instead, the federal Treasury collects the withheld money for regular taxes, Social Security, and Medicare in one big account and only later apportions the inflow–not by adding up all of the FICA taxes but by estimating the amount in conjunction with the Social Security Administration. And this year the tax law alterations seem to have thrown the FICA transfer from the Treasury to the Social Security Trust Fund (SSTF) out of whack. 

In the absence of any revisions to the tax laws, we would expect withheld FICA taxes and individual income taxes to track each other.  FICA is based on a fixed percentage of wages and salaries below a relatively high threshold and withholding amounts tend to stay within fixed brackets.  Thus, if incomes rise or fall in the aggregate, we would expect both FICA and individual withholdings to move about the same amount in either direction.  However, in our present situation, in which individual income tax rates were changed while FICA rates were not, we would expect FICA contributions to remain in sync with the upward trend in wages and salaries even while individual income tax withholding fell.  This, however, is not what is happening.

Unlike earlier dips (which occurred during recessions) FICA taxes should not be decreasing in conjunction with withholding taxes because they were not affected by the changes in the law in 2018!  

This is where the estimates of the Social Security Administration and the Treasury concerning how much revenue should be attributed to FICA are questionable.  While it is possible that an adjustment will be made later on, at present the government has simply not transferred as much money as it should have to the Social Security trust fund–a simple ledger transformation to be sure, but one rife with political implications.  The difference as far as I can tell is about $20 billion, which doesn’t sound like much in context.  However, in 2018, that amount might well determine if the SSTF shows an increasing or declining annual balance.  A blizzard of articles will cry out if the trust fund balance turns negative and a shower of speeches will proclaim that the program is doomed, but who will listen to the small still voice which points out that Social Security has simply been shortchanged by the Treasury itself? 

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.  To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing.  All performance referenced is historical and is no guarantee of future results.  

Securities offered through LPL Financial, member FINRA/SIPC. Investment advice offered through Great Valley Advisor Group, a Registered Investment Advisor. Great Valley Advisor Group and Doylestown Wealth Management, Inc. are separate entities from LPL Financial.