FICA stands for Federal Insurance Contributions Act, and it refers to the payroll taxes that are collected by the federal government to fund various social insurance programs, including Social Security and Medicare. The FICA tax is primarily used to finance the Social Security Disability Insurance (SSDI) program, which provides financial assistance to workers who are unable to work due to a disability.
The FICA tax is calculated based on a percentage of an individual's income. Currently, the tax rate for Social Security is 6.2% of an individual's income, while the tax rate for Medicare is 1.45%. These percentages are applied to a certain earnings threshold, which is adjusted annually to account for inflation. For example, in 2021, the Social Security earnings threshold was $142,800, which means that only the first $142,800 of an individual's income was subject to the 6.2% tax. Any income above this threshold was not subject to the tax.
The FICA tax plays a crucial role in the funding of the SSDI program. When a worker pays into the FICA tax, they are essentially contributing to a fund that will provide financial assistance to them in the event that they become disabled and are unable to work. The amount of an individual's SSDI benefit is based on their work history and the amount of FICA taxes they have paid into the system. In general, the more credits an individual has, the higher their SSDI benefit will be.
The cost of living adjustment (COLA) is a measure of inflation that is used to adjust the amount of SSDI benefits to keep pace with the rising cost of living. The COLA is typically determined by the Consumer Price Index (CPI), which is a measure of the average change in prices paid by consumers for a basket of goods and services. If the CPI increases, then the COLA will also increase, which means that SSDI benefits will also increase to account for the rising cost of living.