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Sorry, this might be a basic question, but I'm having trouble understanding this, so would like to ask here.

I've recently started a full-time position, and I notice that two things are being deducted from my salary in addition to income taxes:

  1. Social Security
  2. Medicare

I had adjusted my income / expenses and factored in taxes, but these two have thrown my calculations off.

I know that these two are mandatory, but what is their function? When do I get to "collect" on Social Security and Medicare?

I'm very clear about 401K now, but I've deferred putting money into my 401K till I get a hang of the other deductions on my salary.

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Doesn't your 401(k) offer a match? –  JoeTaxpayer Jul 28 at 0:42
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As @JoeTaxpayer hints -- if your employer matches 401(k) contributions, that's "free money" you're giving up by deferring getting into the plan. Delaying that deduction, and delaying taking advantage of the employee stock purchase plan, which was also "almost free money" though it made calculating tax returns ugly, are the two financial decisions I most wish I could go back and fix. I understand that you want to understand what your cashflow will look like and figure out how much you can spare -- but the earlier you can make yourself get into the 401(k), the better. At least get the match! –  keshlam Jul 28 at 2:33
    
I understand the importance of the 401K - I just hadn't factored in SS tax or medicare in my calculations, so am re-evaluating it. One other (related) question I should have asked: if social security / medicare covers my retirement, why do I need a 401K (though I realize that might be a separate question). –  Sam Jul 29 at 2:16
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@user1873 - I refuse to speculate on what will happen in 20 years. 20 years ago, the debt was on its way down as a percentage of GDP, after having climbed for the 20 years before that, and fallen for the 20 years before that. What makes you think it won't turn around again in the next 20 years? –  Bobson Jul 29 at 16:57
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@user1873 - Neither raising taxes nor reducing spending is required for the Debt vs GDP number to change. GDP could also increase. But there’s a ton of other things that could happen - the European economy collapsing, for instance. But this is not on topic on this SE - we’re not on Politics.SE, and we’ve gone rather far astray from the question. –  Bobson Jul 30 at 3:47

3 Answers 3

up vote 16 down vote accepted

These two items (social security and taxes) should have also been withheld from any other positions you held previously.

Both these items cover you in the future. Social security when you reach retirement age, or earlier if you are disabled. Medicare to serve a your health insurance when you are a senior citizen.

Everybody who has wage income pays the medicare tax, there is no maximum limit. For Social security you pay your share until your wage income hits a specific limit. Both Social security and medicare are split between the employee and the employer. If you are a contractor you get to pay both parts.

The rate and limits are set by congressional law, and they can be adjusted by congress. In terms of financial crisis they have actually lowered the rates to help workers.

The social security website gives you the limits for each year:

For 2013, the maximum amount of taxable earnings was $113,700. In 2014, the maximum amount of taxable earnings is $117,000.

If you want to be able to track your earnings and benefits go the the social security website to see where you stand. Keep in mind that the it will only have your earnings through the previous year.

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So it's effectively a regressive tax? –  gerrit Jul 28 at 12:58
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I wanted to keep politics out of the answer. –  mhoran_psprep Jul 28 at 12:58
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I was not aware that was a political question. Is it? –  gerrit Jul 28 at 13:00
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@gerrit Social Security is a progressive tax in the sense that the less you make the more you get out of it. "For people with lower than average earnings, the ratio of the lifetime benefits they receive from Social Security to the lifetime payroll taxes they pay for the program is higher than it is for people with higher average earnings." Here's the long version from the Congressional Budget Office. cbo.gov/sites/default/files/cbofiles/ftpdocs/77xx/doc7705/… –  Schwern Jul 28 at 16:15
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"Both these items cover you in the future." It's more realistic to say that these items cover seniors (and other eligible parties) now. By paying social security now you are earning credits toward receiving benefits later. The dollars for those benefits will come from the taxpayers of the future. –  Ben Jackson Jul 28 at 19:54

From Socialsecurity.gov on Medicare:

Medicare is our country’s health insurance program for people age 65 or older. Certain people younger than age 65 can qualify for Medicare, too, including those who have disabilities and those who have permanent kidney failure.

From Socialsecurity.gov on Social Security:

You can apply online for retirement benefits or benefits as a spouse if you:

  • are at least 61 years and 9 months old;
  • are not currently receiving benefits on your own Social Security record;
  • have not already applied for retirement benefits; and
  • want your benefits to start no more than 4 months in the future. (We cannot process your application if you apply for benefits more than 4 months in advance.)

Course the rules may change over time so these are just the current information from those sites.

From the IRS site on one other point that may be useful here:

Social Security and Medicare Taxes

Employers generally must withhold part of social security and Medicare taxes from employees' wages and you pay a matching amount yourself. To figure out how much tax to withhold, use the employee’s Form W-4 and the methods described in Publication 15, Employer's Tax Guide and Publication 15-A, Employer's Supplemental Tax Guide.

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To answer your question about the regressive tax:

Technically it is a regressive tax, however high income earners receive a less of a benefit then those with low wages. So that removes some of the regression.

For example, if a person makes 40K per year for 40 years, their SS retirement benefit, based on a quick calculation on the SS website, their retirement benefit would be about $925. If the twin of this person earned 120K, their benefit would be about $1785, or 49% higher.

So if a person makes triple another person they would only get twice the benefit.

Social security is a political bomb for many reasons. Among them is that it is a government benefit. People who worked their whole lives and take pride in never receiving a hand out, feel that they are owed the transfer payments considered social security.

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I don't see a question about regressive taxes in the OP, so this is answering a question that wasn't asked (and is thus a bad answer, regardless of how accurate it is). –  Bobson Jul 28 at 18:38
    
The question was "what is the purpose of social security?". It seems to me that any discussion of the nature of the tax and the benefits is relevant. The question didn't mention the word "retirement" either, but I would think that would be highly relevant. –  Jay Jul 28 at 20:24
    
It was in the comments. –  Pete Belford Jul 29 at 12:38
    
@PeteBelford - Then it should either be answered in the comments, or another question asked. –  Bobson Jul 29 at 13:40

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