There’s a lot of talk about the future of Social Security but do you know how this massive government program is funded?

Social Security primarily serves Americans of retirement age. Of the 58 million people receiving benefits, about 41 million, or 71%, are retired workers.

Who are the other 29%? Social Security also pays benefits to people with qualifying disabilities, survivors of workers who have passed away, and certain dependents of beneficiaries, such as widows and widowers and some divorced spouses. Many of these dependents are children. In fact, according to a report by the Social Security Administration, the program pays more benefits to children than any other government program does.

Funding Breakdown

A separate 2014 report by the Social Security and Medicare Boards of Trustees says that the two programs combined accounted for 41% of federal expenditures in fiscal year 2013.

How is Social Security funded? The answer is, through payroll taxes – just like Medicare.

About 165 million workers currently pay into Social Security. All money paid into the program flows to two trust funds held by the United States Treasury: The Old-Age and Survivors Insurance (OASI) Trust Fund and the Disability Insurance (DI) Trust Fund Of every dollar paid into Social Security, 85 cents goes to the OASI fund and the remaining 15 cents go to the DI fund.

Rules stipulate that money in these accounts may only be used to pay Social Security benefits and administrative costs. By law, the two funds only invest in special Treasury bonds guaranteed by the U.S. government. Interest is paid at market rates on all invested funds.

The funds receive payments through payroll tax deductions. If you work for someone else, you pay 6.2% of your earnings to Social Security up to your first $117,000 of income. Your employer pays another 6.2%. If you’re self-employed, you have to fork over the entire amount – 12.4%.

According to the Social Security Administration, for each dollar paid into the program, less than one penny is used for administrative costs, making it one of the most efficient agencies in the federal government.

Is Social Security in Trouble?

According to the Social Security and Medicare Trustee’s report, the nation's rapidly aging population will cause the outflow to increase substantially through at least the mid-2030s.

The report states that the DI fund is in danger of depletion by late 2016 because costs have exceeded non-interest income since 2005. Barring government action, people receiving payments from the DI fund will see reductions in 2016.

By 2033, the combined funds will be depleted and tax revenue will only pay about three-quarters of benefits through Social Security’s current projection period ending in 2088. In other words, retiree benefits could be reduced in as few as 19 years.

The Bottom Line

Social Security isn’t only about retirement benefits. The program provides assistance to a wide range of people in all age groups. You and your employer (or you alone if you’re self-employed) pay 12.4 % of your salary into the program. The current average monthly benefit is about $1,294 per month; yours will depend on your lifetime earnings. According to Social Security, benefits of future retirees are in danger of being reduced. Changing that picture will require that policymakers address upcoming funding shortfalls.

Related Articles
  1. Retirement

    To Love, Honor and Collect: You, Your Spouse and Social Security

    You may have earned your Social Security benefits on your own, but if you’re married, your collection strategy should be a joint decision.
  2. Retirement

    What If Social Security Disability Runs Out Of Money?

    The social security disability program is nearly bankrupt and could run out of money by 2016.
  3. Budgeting

    The Impact Of Your Starting Age On Social Security

    Retiring at 62 sounds nice, but it could affect the amount of social security you receive.
  4. Taxes

    How To Make Social Security Work

    What's going to happen to Social Security by the time you retire? What can be done to help it?
  5. Retirement

    Introduction To Social Security

    You've probably contributed to this fund, but will you reap the benefits? Find out here.
  6. Savings

    Is Social Security Set To Fail?

    No politicians want to touch this issue, but many Americans have serious reason for concern.
  7. Term

    What are Pension Funds?

    A pension fund is a company-sponsored fund that provides income for employees in retirement.
  8. Credit & Loans

    5 Signs a Reverse Mortgage Is a Bad Idea

    Here are the key situations when you should probably pass on this type of home loan.
  9. Retirement

    Retirement Planning for Entrepreneurs and Small Businesses

    If your business has receiveables, here's a smart way to leverage them to build up your retirement fund fast.
  10. Retirement

    Overhaul Social Security to Fix Retirement Shortfall

    There are several theories and ideas about how we can make up for the $6.6 trillion retirement savings shortfall in America. Adjustments to Social Security and our retirement savings plans are ...
RELATED TERMS
  1. Social Security

    A United States federal program of social insurance and benefits ...
  2. Dynamic Updating

    A method of determining how much to withdraw from retirement ...
  3. Possibility Of Failure (POF) Rates

    The likelihood that a retiree will run out of money prematurely ...
  4. Safe Withdrawal Rate (SWR) Method

    A method to determine how much retirees can withdraw from their ...
  5. Mandatory Distribution

    The amount an individual must withdraw from certain types of ...
  6. Equitable Division

    A legal theory that guides how property acquired during the course ...
RELATED FAQS
  1. Why would someone change their Social Security number?

    In general, the Social Security Administration, or SSA, does not encourage citizens to change their Social Security numbers, ... Read Full Answer >>
  2. Are spousal Social Security benefits taxable?

    Your spousal Social Security benefits may be taxable, depending on your total household income for the year. About one-third ... Read Full Answer >>
  3. What are the best ways to sell an annuity?

    The best ways to sell an annuity are to locate buyers from insurance agents or companies that specialize in connecting buyers ... Read Full Answer >>
  4. Are spousal Social Security benefits retroactive?

    Spousal Social Security benefits are retroactive. These benefits are quite complicated, and anyone in this type of situation ... Read Full Answer >>
  5. Are Social Security payments included in the US GDP calculation?

    Social Security payments are not included in the U.S. definition of the gross domestic product (GDP). Transfer Payments For ... Read Full Answer >>
  6. Where are the Social Security administration headquarters?

    The U.S. Social Security Administration, or SSA, is headquartered in Woodlawn, Maryland, a suburb just outside of Baltimore. ... Read Full Answer >>

You May Also Like

Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!