Federal Insurance Contributions Act (FICA): Lessons for Australia

While the Federal Insurance Contributions Act (FICA) might sound like a uniquely American acronym, its influence on the US social safety net offers valuable insights for Australians interested in the future of superannuation, Medicare, and welfare. With recent changes to FICA tax rates and wage thresholds in 2025, the US model of funding retirement and healthcare deserves a closer look—especially as Australia debates the sustainability and evolution of its own systems.

What is FICA? The Backbone of US Social Security

FICA is a federal law in the United States that mandates payroll taxes to fund Social Security and Medicare programs. Every US worker and employer pays a portion of their wages into these funds, which are then distributed to retirees, the disabled, and those needing health coverage over 65. In 2025, the combined FICA tax rate stands at 15.3% (split evenly between employer and employee), covering:

• Social Security (OASDI): 12.4% on wages up to USD $168,600 (2025 update)

• Medicare: 2.9% on all wages, with an additional 0.9% for high earners above USD $200,000

This system has long been the foundation of American retirement security. In 2025, the wage cap for Social Security contributions increased by USD $5,100, reflecting inflation and rising wages. That means high-income earners are paying more into the system than ever before.

How Does FICA Compare to Australia’s Superannuation and Medicare Levy?

Australia’s approach to retirement and healthcare is different, but there are striking similarities—and key contrasts. The Superannuation Guarantee (SG) requires employers to contribute 11% of an employee’s ordinary time earnings (rising to 12% by 2026), while the Medicare Levy stands at 2% of taxable income for most Australians. Unlike the US, Australia does not deduct a separate payroll tax for retirement from employees’ wages; instead, the SG is employer-funded, and super accounts are privately managed.

Key differences include:

• Funding: FICA is a pay-as-you-go system—current workers fund current retirees. Australia’s super is fully funded and individually owned.

• Coverage: FICA supports both pension and healthcare. In Australia, super funds retirement, while the Medicare Levy (plus government funding) supports healthcare.

• Taxable Base: FICA applies to all earned income up to a cap; super contributions are capped but can be voluntary above the minimum.

With rising life expectancy and demographic shifts, both countries face pressure to adapt their systems to remain sustainable. Australia’s 2025 Intergenerational Report flagged concerns similar to those seen in the US: an aging population, fewer workers per retiree, and increasing healthcare costs.

2025 US FICA Updates: Policy Changes and What They Signal

In 2025, several FICA-related policy changes are in play:

• Wage Base Increase: The taxable maximum for Social Security rose to USD $168,600, increasing both employer and employee contributions for high earners.

• Medicare Surtax Thresholds: The 0.9% additional Medicare tax continues to apply to individuals earning above USD $200,000, unchanged from previous years, but with ongoing debate about raising thresholds in Congress.

• Solvency Debates: With Social Security trust funds projected to deplete reserves by the mid-2030s, US lawmakers are considering further increases in the wage base, benefit cuts, or a rise in the FICA tax rate.

These changes mirror Australia’s own superannuation and Medicare debates—especially as policymakers weigh higher compulsory contributions, means-testing, and potential tax changes to keep the system viable long-term.

What Can Australia Learn from FICA?

While Australia’s superannuation and Medicare systems are distinct, there are lessons to draw from FICA’s structure and ongoing reform efforts:

• Indexation Matters: Regularly adjusting contribution caps and thresholds helps keep funding in line with inflation and wage growth.

• Balancing Contributions: The split between employer and employee contributions affects take-home pay, business costs, and system stability—a recurring topic in Australia’s super debates.

• Transparency and Trust: FICA’s dedicated funding streams are visible to workers, building public trust in the system. Australia’s super statements and Medicare transparency efforts echo this need.

• Flexibility for the Future: Both countries face demographic and economic headwinds. Policy agility—whether by adjusting rates, means tests, or benefit formulas—will be crucial.

Ultimately, Australia’s hybrid model—compulsory, privately managed super plus government-backed Medicare—offers advantages in individual ownership and risk-sharing. But as the US experience shows, ongoing tweaks and transparent funding are vital to keep public confidence and fiscal health.