Tag: Social Security Rate

Categories
Forex Fundamental Analysis

What Should You Know About ‘Social Security Rate For Companies’ Forex Fundamental Indicator?

Introduction

Introduction

Introduction

Social Security Program is one of the most extensive Government programs in the world that pays out billions of dollars to its citizens each year. Social Security is a macroeconomic program intended to act as a safe-net for active workers of the United States. Changes related to this program tends to affect the majority of the population. Hence, understanding its role and impact on the living conditions of people can give us a better insight into how such programs work.

What is Social Security Rate For Companies?

Social Security Program: The Social Security Program is designed to facilitate retirement benefits, survivor benefits, and disability income for the citizens of the United States. It is run by the federal agency known as Social Security Administration. Social Security is the word used for the Old-Age, Survivors, and Disability Insurance (OASDI) program.

The program was born on August 14, 1935, where President Franklin D. Roosevelt signed the Social Security Act into law of the United States. Since then, the program has continuously evolved and changed significantly over the years. It is a government insurance program designed to act as a safety net for the working population in the United States.

To be eligible for the Social Security retirement benefits, the worker must have an age of 62 at a minimum and should have enrolled and paid into the program for ten years or more. Workers who wait till later ages like 66 or 70 receive higher and higher benefits accordingly.

Apart from the worker himself, a divorced spouse can also be eligible for benefits provided she has not remarried, and their marriage lasted over ten years. Similarly, children of retirees can also be eligible until the age of 18, which can be longer in the case of disability or child being a student.

Social Security Tax: It is the tax levied upon both the employer and employee to fund the Social Security Program (SSP). It is collected as a payroll tax as mandated by the Federal Insurance Contributions Act (FICA) and the Self-Employed Contributions Act (SECA).

Social Security Rate: For the year 2020, the Social Security Rate is 12.4% that is evenly divided between the employee and the employer. It implies the Social Security Rate for Companies is 6.2%.  Social Security Tax is levied on the earned income of employees and self-employed taxpayers. Employers generally withhold this tax from the employee’s paycheck and forward it to the Government.

It is also worth mentioning that there is a tax cap to the Social Security Fund. For 2020, the Social Security tax cap is $137,700, meaning any income earned above 137,700 is not subject to the Social Security tax.

How can the Social Security Rate For Companies numbers be used for analysis?

Social Security is regressive, meaning it takes a more significant percentage of income from low-income earners than their higher-income counterparts. It occurs because of the tax cap, as mentioned earlier, due to which higher-income earner’s portion of income is not subject to this tax deduction.

The collected funds are not stored for the currently paying employee; instead, they are used for the retirees currently eligible for collection. Some have raised concerns on this way of approach when the baby boomer generation starts to collect its benefits, then the ratio of paying to the collecting people would be tipped off. It would mean that more people are collecting benefits than the people paying into it.

Hence, a common worry in the 21st century is the insolvency of the Social Security Funds due to the increased life expectancy of people and decreasing worker-retiree ratio. Proposed solutions to this from analysts were to increase the current rate to keep the program funded. Still, politicians are hesitant to endorse it due to fear of backlash or negative sentiment outburst from the public.

The 2020 report from the OASDI trustees projects that the retirement funds would be depleted by 2035 and disability funds in 2065. When that occurs, the taxes would not be enough to fund the entire Social Security program, and the Government needs to fill this gap. It may result in higher taxes on workers, fewer benefits, higher age requirements, or a combination of these.

For companies, an increase in Social Security Taxes directly cut down their profit margin, and hiring is more expensive. As a result, companies would be forced to keep employees only when required to avoid losses. Hence, Tax rates have a cascading effect on business profitability for companies as well as employment rates for the United States. When Social Security Taxes increase, the income offered to the employees is also affected, which can discourage personal consumption and spending for the working citizens.

Impact on Currency

The Social Security Rate for the Companies and the employees are revised every year. For consecutive years it tends to remain constant and tends to change in small incremental steps over a few years at a time. Hence, the volatility induced in the currency markets is almost zero to negligible most of the time unless significant changes occur. The changes also would be priced in through news updates into the market long before we receive official statistics.

Hence, Social Security Rate is a low-impact indicator and can be overlooked for more frequent statistics for the FOREX markets.

Economic Reports

The U.S. Social Security Administration provides the complete historical data of the Social Security tax rates for both the employee and employer on its official website. The Organization for Economic Co-operation and Development (OECD) also maintains the same for its member countries on its official website.

Sources of Social Security Rate For Companies

Social Security Rates for companies can be found on the Social Security Administration website.

Social Security Rates for employees can be found on the OECD’s official website.

Social Security Rates for companies (similar policies with different names) across the world can be found on Trading Economics.

How Social Security Rate for Companies News Release Affects Forex Price Charts

By law, companies are required to contribute half of the social security rate that their employees contribute. In the U.S., this rate for companies in 7.65% for each employee on the payroll for up to $ 137,700 per employee. This rate is reviewed annually and has remained unchanged in the U.S. for the past 25 years. For forex traders, this release of this rate in the U.S. is considered a non-news event since it is not expected to impact the forex market.

The screen capture below shows the current social security rate for companies in the U.S. taken from Trading Economics.

The latest review of the U.S. social security rate was on October 10, 2020, at 4.00 PM ET, and the press release can be accessed here.

Now, let’s see how this news release made an impact on the Forex price charts.

EUR/USD: Before social security rate release October 10, 2020, 
just before 4.00 PM ET

As can be seen on the above 15-minute EUR/USD chart, the pair is on a weak downtrend before the news release. This downtrend is evidenced by the candles forming slightly below the 20-period Moving Average between 12.00 PM and 3.45 PM ET. Furthermore, the Moving Average appears to be flattening.

EUR/USD: After social security rate release October 10, 2020,
at 4.00 PM ET

As expected, there was no market volatility after the news release about the social security rate for 2020. The chart above shows a 15-minute “Doji” candle forming after the news is released. The pair later traded on a neutral pattern as the 20-period Moving Average flattened. The news release about the social security rate for companies did not have any impact on the price action of the EUR/USD pair.

Let’s quickly see how this new release has impacted some of the other major Forex currency pairs.

GBP/USD: Before social security rate release October 10, 2020, 
just before 4.00 PM ET

Before the news release, the GBP/USD pair is on a steady uptrend, as shown by the chart above. An hour to the release, the uptrend became subdued, and the pair adopted a neutral pattern.

GBP/USD: After social security rate release October 10, 2020, 
at 4.00 PM ET

After the news release, the pair forms a 15-minute “Doji” candle. It continues to trade in the neutral pattern observed earlier.

AUD/USD: Before social security rate release October 10, 2020, 
just before 4.00 PM ET

 AUD/USD: After social security rate release October 10, 2020, 
 at 4.00 PM ET

The AUD/USD pair shows a similar neutral trading patter as the EUR/USD and GBP/USD pairs before the news release. This trend is evidenced by the 15-minute candlesticks forming around a flattening 20-period Moving Average between 1.00 PM and 3.45 PM ET. After the news release, the pair forms a 15-minute “Shooting star” candle and continues to trade in the same neutral pattern as before.

From the above analyses, it can be seen that the news release of the social security rate for companies does not have any impact on the price action.

Categories
Forex Fundamental Analysis

Understanding ‘Social Security Rate For Employees’ Forex Fundamental Driver

Introduction

Introduction

Introduction

The Social Security Program of the United States is the government insurance program for retirees, disabled, and survivors. It is one of the most extensive Government Spending programs and affects the majority of its population. Hence, it is a macroeconomic statistic, and changes in the same results a significant impact on its citizens. An insight into the Social Security Rates and how it affects the individual and the economy as a whole can help us understand the monetary structure of the United States.

What is Social Security Rate For Employees?

The Social Security Program (SSP) is managed by the Social Security Administration (SSA) of the United States. The SSA is a federal agency and defines the SSP as a protection program against income loss due to retirement, disability, or death. The Social Security Program is officially called the Old-Age, Survivors, and Disability Insurance (OASDI) program.

The funds collected by the SSP are divided between two funds, namely the Old-Age and Survivors Insurance (OASI) and Disability Insurance (DI) Trust Funds. Retired workers and their families, or survivors (ex: wife of an expired husband) receive benefits from the OASI funds. The DI trust funds provide benefits to the disabled and their families. The benefits are paid out monthly to the eligible people.

The Social Security Programs receives its funds primarily from the currently active employees enrolled in the program, employers, and as well as self-employed citizens. The funds received at present are not stored for the future, instead, they are utilized to pay out for the currently eligible retirees. The cycle goes on, and it means the current employee pays out for the already retired people, and when the employee himself retires would be paid out through funds collected from the paying employees at that time.

Apart from the employee, employer, and self-employed, funds receive income from investments and interests on investments, and taxations of benefits. For the year 2020, the Social Security Rate is 12.4%, which is evenly divided amongst the employer and the employee. Hence, the employee pays 6.2% of their income. Generally, It is deducted monthly from their income. On the other hand, the self-employed people like small shop owners or freelancers are subject to pay the full 12.4% themselves.

The benefits apply to people who have enrolled and have paid for a minimum of ten years. The retirement age at which they are eligible for collecting their pension is 62, while people who wait longer, like the age of 66 or 70, receive higher and better benefits accordingly. The Social Security Tax has a cap limit of $137,700, above which the earned income is not subject to the tax deduction.

How can the Social Security Rate For Employees numbers be used for analysis?

Since the Social Security deductions are directly taken out from the gross salary, it directly affects the Personal Consumption Expenditure (PCE) and thereby Consumer Spending. Both of these are macroeconomic indicators bearing high significance in terms of currency market volatility. Suppose the taxes increase, Consumer Spending decreases, which can drive the economy into a recession. Consumer spending makes up two-thirds of the United State’s GDP.

The program collects from millions of people and pays out to millions of people. The transactions are in billions of dollars every year. Any change in the percentage is bound to affect a large chunk of the country’s population directly. Hence, the changes in the rates are less frequent over the years and change only during significant policy reforms.

The regressive nature is often criticized, meaning the more affluent section of the society ends up paying lesser than the lower-income bracket people due to the tax cap limit. Also, the model of the Social Security Program is a cause of worry for many as the increased life expectancy and the diminishing worker-to-retiree ratio will ultimately result in depletion of funds soon.

As the population stops to grow, and more people retire than the number of people actively working will ultimately force the Government to either raise taxes or retirement age-limit or decrease benefits. None of those above options is favorable, and the Government needs to plug this gap in funds sooner than later.

 Impact on Currency

The Social Security Rate for the employees is revised every year. Most of the time, it tends to remain constant and changes only in small incremental steps over a few years at a time. Therefore, the volatility induced in the currency markets is negligible unless significant changes occur. Above all, the changes would be priced into the market through news updates long before official statistics are published. Hence, Social Security Rate for employees is a low-impact indicator and can be overlooked for more frequent statistics in the currency markets.

Economic Reports

The Social Security tax rates for both the employee and employer are provided by the Social Security Administration of the United States on its official website. The historical figures of the same are also available. The OECD (Organization for Economic Co-operation and Development) also maintains the tax rates for employees of its member countries on its official website.

Sources of Social Security Rate For Employees

Social Security Rates for employees is available on the Social Security Administration website.

Social Security Rates for employees is also available on the OECD’s official website.

Social Security Rates for employees (similar policies with different names) across the world can be found in Trading Economics.

How Social Security Rate For Employees Announcement Affects The Price Charts

For employees, the social security tax is deducted through payroll withholding by the employer. This rate is split in half between the employee and the employer. Since the social security rate in the US is 15.3 %, an employee contributes 7.65% of their earnings up to $137,700.

The screengrab below shows the current social security rate for companies in the US from Trading Economics.

The latest review of the US social security rate was on October 10, 2019, at 4.00 PM ET, and the press release can be accessed here.

USD/CAD: Before Employee Social Security Rate Release October 
10, 2019, just before 4.00 PM ET

As can be seen on the above 15-minute chart, the USD/CAD pair was trading on a neutral trend before the news release. This trend is shown by the candles forming around an already flat 20-period Moving Average. This trend signifies relative market inactivity at this time.

USD/CAD: After Employee Social Security Rate Release October 
10, 2019, at 4.00 PM ET

After the news release, no market volatility is observed. The US/CAD pair forms a 15-minute “Shooting Star” candle. Afterward, the pair struggled to alter the trading pattern with the candles attempting to cross below the 20-period Moving Average but subsequently continued trading in the previously observed neutral pattern.

USD/JPY: Before Employee Social Security Rate Release October 
10, 2020, just before 4.00 PM ET

Before the news release, the USD/JPY market is on a weak uptrend. The pair can be seen struggling to maintain this trend as observed by multiple bearish spikes. The pair adopts a downtrend 30 minutes before the news release.

USD/JPY: After Employee Social Security Rate Release October 
10, 2019, at 4.00 PM ET

After the news release, the pair forms a 15-minute bearish candle. However, the news is not significant enough to maintain the earlier observed downtrend.

USD/CHF: Before Employee Social Security Rate Release October 
10, 2020, just before 4.00 PM ET

USD/CHF: After Employee Social Security Rate Release October 
10, 2019, at 4.00 PM ET

Before the news release, the USD/CHF pair shows a similar trading pattern as the USD/CAD pair. The pair was trading on a neutral trend with 15-minute candles forming around a flattening 20-period Moving Average. As the USD/JPY, the pair showed signs of reversing into a downtrend 30 minutes before the news release. After the release, USD/CHF formed a 15-minute “Shooting Star” candle. It later continued trading in a downtrend with subsequent candles forming below the 20-period Moving Average.

Bottom Line

On October 10, 2019, the US effectively increased the social security rate. Theoretically, this is supposed to be positive for the USD. However, as shown by our analyses, this news release had no significant price action impact on any currency paired with the US dollar.

Categories
Forex Fundamental Analysis

Everything About ‘Social Security Rate’ – An Important Fundamental Forex Driver

Introduction

Introduction

Introduction

During the recent Coronavirus pandemic, the whole debate about social security has taken CenterStage. At a point in life, we all grow old. Since not everyone will go through life-saving for retirement, our main worry then would be; how to pay bills on time, how to provide for our families should we lose out jobs or become incapable of working.

Social security attempts to anticipate all this and offer practical solutions. So why should forex traders care about the social security rate? This article seeks to understand what impact of social security rate has on a country’s currency. To establish this, we first need to understand what it is and what it entails.

What is Social Security?

Social security has been given several definitions. In the UK, it is considered to be any form of monetary assistance from the government towards individuals who have inadequate or no income. In the US, social security is a federal program that is meant to provide retirees, the poor and the disabled with income and health insurance.

Thus, social security is the guarantee that a government gives to its vulnerable citizens that in the event they are exposed to a specific future risk, they will be looked after. The social security program, therefore, uses public resources to provide economic support for private citizens.

What is Social Security Rate?

This rate is the percentage of earnings that is charged on both the workers and their employers. It is used to fund the social security program.

How it is Calculated

Various countries have different mechanisms of arriving at the social security rate for both the employed and self-employed.

In the US, the social security rate is 15.3%. It is a combination of a 12.4% social security tax and Medicare tax of 2.9%. In 2020, the 12.4% social security tax is applied on everyone for all income up to $137,700; any amount earned beyond this threshold is exempt from the social security tax. The social security tax is deducted on an individual’s payroll through payroll withholding by the employer. This rate is split in half between the employee and the employer.

Therefore, an individual contributes 6.2% for social security and 1.45% of their earnings while the employer matches the other half. The employer then remits the withheld amount together with their contribution to the IRS. For those that are self-employed, since they are the employee and the employer at the same time, they have to pay both halves of the social security tax. In the UK, the social security rate is 14%. A comprehensive list of current and previous social security rates for every country can be found on the Trading Economics website.

Purpose of the Social Security

Conventional taxes are meant to be a revenue source for government expenditure or meant to be punitive. The social security tax is meant to a safety net for the contributors should they fall on hard times. It also functions as an economic guarantee for the most vulnerable in society. The chart below shows the dependency on social security benefits by various household income class in the US.

Source: AARP

Some of the benefits of the social security program include:

Retirement benefits

This offers workers and their dependents a replacement income for when they choose to retire. The earliest retirement age is 62 years. For one to be eligible for retirement benefits, they need to have worked for a minimum stipulated period. This period differs depending on the country. In the US, it is for ten years. The amount of money received largely depends on one’s lifetime earnings and the cost of living.

Disability benefits

Also known as disability insurance, the Social Security and Supplemental Security Income disability is meant to provide an income for the disabled. For one to be eligible, they need to have worked for a minimum number of years, depending on the age when the disability occurred.

Medical cover

This is the health insurance coverage that covers part of medical bills for ageing workers, people with permanent health conditions and those with disability.

Survivors benefits

This is meant to help those who are bereaved to cope

Social Security Rate and the Economy

The social security program differs in every country. However, in every economy, such programs are meant to provide stability to the households by providing a replacement stream of income, hence avoiding poverty. In the US alone, close to 56 million people are recipients of social security benefits.

Source: International Labour Organization

As shown in the chart above, higher expenditure in terms of social security corresponds to a higher GDP per capita. While some might argue that a higher social security rate reduces the amount of disposable income, the multiplier effect generated by the resultant social security benefits outweighs any short term loss.

It is worth noting that the families and individual who receive these benefits use the income to purchase goods and services. In 2019, it was estimated that the social security program injected over $1 trillion into the economy. Therefore, the presence of social security helps to maintain demand in the economy in times of crises and some cases, increase the demand.

The benefits of the social security program have a powerful multiplier effect within the economy. The businesses that receive this income from the consumers use it to increase production and hire more employees. These expansions, in turn, generate more revenue for the government to use in national expenditure while the earnings by the employees serve to create more consumption and increased savings.

How Social Security Rate Impacts Currency

As we have already established above, a higher social security rate creates a multiplier effect that generates more revenue within the economy. The strength of a country’s currency is a reflection of its economy. The growth in the national economy, therefore, corresponds to the appreciation in the value of the currency.

Conversely, lowering the social security rate will reduce the multiplier effect within the economy, which leads to shrinking of the national economic growth. For forex traders, lowering the social security rate could be a foreboding of a looming reduction in the national GDP growth, prompting expansionary monetary and fiscal policies. Therefore, in the long run, a low social security rate leads to the weakening of a country’s currency against other pairs.

How Social Security Rate News Release Affects The Forex Price Charts

Forex traders rarely pay any attention to the release of the new social security rates. This inattentiveness is because as an economic indicator, the social security rate is a low impact indicator. However, it is essential nonetheless to know how the news release of the social security rate affects the price action of different pairs.

In the UK, the national government through the Department for Work and Pensions sets the social security rate and is reviewed annually. A breakdown of the UK social security rate can be found HM Revue and Customs website. It should be noted that for the past 25 years, the US government has not changed the social security rate, as can be seen here. Below is a screengrab from the Trading Economics’ website on the UK and US social security rates.

UK social security rate

US social security rate

In the latest release on April 6, 2020, around 1100 GMT, the UK government revised the social security rate upwards from 12% to 14%. Now, let’s see how this news release made an impact on the Forex price charts.

GBP/USD: Before social security rate release April 6, 2020

We plotted a 20-period Moving Average on a one-hour GBP/USD chart. As can be seen on the chart above, the pair is in recovery with the candles crossing over the 20-period Moving Average and subsequently forming above it.

For the GBP/NZD and GBP/AUD pairs, the market is in a general downtrend before the announcement of the hike in the social security rate. This trend is evidenced by the subsequent candles forming below the 20-period Moving Average, as shown in the charts below.

GBP/NZD: Before social security rate release April 6, 2020,

GBP/AUD: Before social security rate release April 6, 2020

For forex traders, going long on the GBP/USD wile short on the GBP/NZD and GBP/AUD pairs would have been an excellent trading opportunity since the prevailing market trends would favour them.

Let us now see if the release of the new social security rates changed the market trend for these pairs.

GBP/USD: After social security rate release April 6, 2020

In theory, raising the social security rate should be positive for the GBP. Bust, as can be seen in the GBP/USD one-hour chart, the news release, did not have any impact on the pair to change the market trend significantly. The lack of impact can be observed for the GBP/NZD and the GBP/AUD pairs as shown by the charts below.

GBP/NZD: After social security rate release April 6, 2020

GBP/AUD: After social security rate release April 6, 2020,

Whereas the social security rate plays a significantly important role in the overall economy and the GDP, it is apparent that its impact in the forex market is negligible.