Who the heck is FICA, and why is he getting my money?

That is the question my kids asked when they received their first paycheck. As I explained to them, and they will have to explain someday to their children, FICA is the money the government uses to pay older people Social Security and provide Medicare. People like grandpa and grandma. I won’t tell you what the kids said, I will leave that to your imagination.

I was asked this question aging recently by a reporter and had to give a little better answer, so here is what I said.

FICA is the tax that funds Social Security and Medicare. These two programs provide benefits to older Americans and people with disabilities. FICA was created during the Great Depression to help address the problem of poverty among the elderly. It continues to play an important role today by providing funding for Social Security and Medicare.

FICA taxes paid by employees, through withholding by employers, are matched by the employer and paid into the IRS. The tax rate is made up of two components. The first component is the Social Security piece which applies to earned income at a rate of 6.2% for employees and 12.4% for those that are self-employed. The second component is the Medicare component which applies to earned income at a rate of 1.45% for employees and 2.9% for those that are self-employed. The combined rate for both components is 7.65% for employees and 15.3% for the self-employed.