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

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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.

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