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.
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.
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.