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. Investing

    10 Ways to Effectively Save for the Future

    Savings is as crucial as ever, as we deal with life changes and our needs for the future. Here are some essential steps to get started, now.
  8. Professionals

    Why Women Are Underprepared for a Spouse’s Death

    Women are typically less prepared for the death of a spouse than men. An advisor can help mitigate some of the financial burdens widows may end up facing.
  9. Professionals

    3 Benefits of Working Longer (and Retiring Later)

    There are many reasons why folks in their 60s may want to keep working until at least age 70. Here are three.
  10. Professionals

    How to Get Free Social Security Spousal Benefits

    Married couples should thoroughly examine whether they are eligible to collect free spousal benefits on their Social Security income.
  1. What are the main kinds of annuities?

    There are two broad categories of annuity: fixed and variable. These categories refer to the manner in which the investment ... Read Full Answer >>
  2. What are the risks of rolling my 401(k) into an annuity?

    Though the appeal of having guaranteed income after retirement is undeniable, there are actually a number of risks to consider ... Read Full Answer >>
  3. Are Cafeteria plans exempt from Social Security?

    Typically, qualified benefits offered through cafeteria plans are exempt from Social Security taxes. However, certain types ... Read Full Answer >>
  4. How are variable annuities taxed at death?

    If the owner of a variable annuity dies before receiving full payment, his beneficiary must pay taxes on any earnings received. ... Read Full Answer >>
  5. Can dividends be paid out monthly?

    Though it is more common for dividends to be paid quarterly or annually, some stocks do pay monthly dividends. Dividends: ... Read Full Answer >>
  6. Can my 401(k) be seized or garnished?

    As long as your retirement funds are held in your 401(k) and you do not take them as distributions, your 401(k) cannot be ... Read Full Answer >>

You May Also Like

Hot Definitions
  1. Term Deposit

    A deposit held at a financial institution that has a fixed term, and guarantees return of principal.
  2. Zero-Sum Game

    A situation in which one person’s gain is equivalent to another’s loss, so that the net change in wealth or benefit is zero. ...
  3. Capitalization Rate

    The rate of return on a real estate investment property based on the income that the property is expected to generate.
  4. Gross Profit

    A company's total revenue (equivalent to total sales) minus the cost of goods sold. Gross profit is the profit a company ...
  5. Revenue

    The amount of money that a company actually receives during a specific period, including discounts and deductions for returned ...
  6. Normal Profit

    An economic condition occurring when the difference between a firm’s total revenue and total cost is equal to zero.
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!