9 to 5 Culture, Financial Wisdom

Hey! Why Has My Paycheck Shrunk?

So the holidays are over and I’m facing that extra credit card debt from all those gifts that seemed like such a good idea only a few short weeks before, I trudge back to the office in my yule-tide hang over, open up my pay stub and—Wham!  Less money?  Could that be right?  I double check my old pay stubs just to be sure, and, yep, my paycheck is definitely smaller.  Why?  I mean, I remember Obama talking about raising taxes on those making several hundred thousand a year, but even if that salary number at the top of my pay stub is in Kuwaiti dinar instead of US dollars, I certainly shouldn’t be a candidate for that tax hike, right?

Wrong.  Everyone who is subject to payroll taxes (nearly everyone who earns income from their labor) was hit with a tax increase at the turn of the year.  Look for the box on your pay stub that says “OASDI.”  It stands for Old Age, Survivor & Disability Insurance, but most people know it as the social security tax.  In recent history the OASDI was set at 4.2%.  This year it was “allowed to rise” back to 6.2%. How’s that for all the year-end rhetoric of increasing taxes only on the wealthy—most of whom don’t earn their income from labor anyway?

To add insult to injury, social security taxes are charged both to the employee and the employer in equal amounts.  That is, an employer has to pay 6.2% in social security taxes for the wages it pays for all of its employees, which directly reduces the amount of money the employer could pay in extra wages to employees.  The employees’ paychecks are then reduced  by another 6.2% on payday.   In effect, this means that the total take-home pay workers would get is reduce by twice the amount they see in their OASDI box.

Want some salt in that wound?  Social security taxes are regressive, meaning the percentage of income people pay in social security taxes decreases the wealthier they get.  How so?  The tax is only applied to the first $113,700 of a person’s income.  Using just the employee-side 6.2% number, that means that Sally, who makes $113,700 per year, will pay $7,049 in social security taxes, which is 6.2% of her income.  John, who makes $500,000 per year, will also pay $7,049 in social security taxes, but that’s a mere 1.4% of his income.  Thus, be clear, folks, the OASDI is a tax focused on working and middle class Americans.

I’m not saying our social security coffers couldn’t use the boost, nor have I missed the fact that the majority of the tax increases initiated at the turn of the calendar have been aimed at higher-income earners.  See http://blog.heritage.org/2013/01/08/tax-changes-2013/.  But for all the hot air spewed from both sides of the aisle about protecting working Americans from increased taxes in this precarious economy, I felt betrayed by the stealth tax hike hiding out in my OASDI box.


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