While being a tax-paying citizen of the United States does provide for certain benefits and protections, and several organizations are responsible for helping to oversee and ensure that tax dollars are used in a reasonably productive manner, most people don’t think of their tax dollars as something that provides a specific and tangible “return on investment”. Yet the irony is that when it comes to FICA taxes on wages or self-employment income, which are used to fund Social Security and Medicare benefits, it actually is possible to have FICA taxes produce a long-term Return On Investment (ROI).
The reason that Social Security FICA taxes can generate a positive ROI is that ultimately, any wages or self-employment income that is taxed for Social Security purposes is also income that will be considered when calculating Social Security benefits. And since Social Security itself is functionally an income-replacement formula – based on an individual’s highest 35 years of inflation-adjusted earnings, with means-tested replacement rates based on their income levels – the more income that is included for FICA tax purposes, the higher Social Security benefits will be.
In fact, those eligible for the lower and middle FICA replacement rates – up to $64,788 of lifetime inflation-adjusted average earnings – the ROI of paying FICA taxes can generate real returns that are actually competitive with current TIPS bond yields, potentially rising even higher for those in the lowest income tier, especially for individuals who are also older (in their 50s or early 60s) but very healthy (with a long life expectancy to continue receiving Social Security benefits in retirement itself). Although for upper-income individuals, even though with above-average health, the ROI on Social Security FICA taxes is generally negative.
The significance of the potential for Social Security taxes generating a positive ROI is that, at a minimum, paying FICA taxes for many is less of a “tax” and more of a forced-savings investment with a bond-like return (albeit not available as a liquid account balance and only as a lifetime Social Security annuity payment). And for those in more flexible situations to control their income reported as wages – from S corporation owners, to those with spouses or other family members who might be paid through the family business – the potential for a positive ROI from FICA taxes can substantially alter intra-family business tax planning strategies!
source https://www.kitces.com/blog/social-security-fica-self-employment-taxes-return-on-investment-roi-irr/?utm_source=rss&utm_medium=rss&utm_campaign=social-security-fica-self-employment-taxes-return-on-investment-roi-irr
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