In essence, Social Security programs are funded through payroll taxes. Employees and their employers each pay 6.2% (4.2% for employees in 2011 and 2012) of earnings for Social Security taxes; 1.45% of earnings for Medicare taxes. Medicare is the country’s basic health insurance program for people age 65 and older, and for many people with disabilities. In sum, a total of 15.30% of an employee’s earnings are subject to Social Security and Medicare taxes, with employee and employer each paying 7.65% of an employee’s earnings. The payroll tax for Social Security was temporarily reduced in 2011 and 2012 for employees in an effort to help the economic recovery following the financial crisis in 2008 and 2009.
These payroll taxes help fund the Social Security programs. Deductions for Social Security taxes were up to a salary limit of $128,400 in 2018; the limit is $132,900 in 2019. People who earn more than the taxable maximum do not pay Social Security taxes on that amount or have those earnings factored into their future Social Security payments. There is no wage limit for the Medicare tax. Beginning in 2013, workers pay an additional 0.9 percent Medicare tax on income exceeding certain thresholds: $200,000 for single taxpayers, $250,000 for married.
Current payments into Social Security are being dispersed to those receiving benefits now – excess payments remain in Social Security trust funds. So, money you pay in taxes today is NOT being set aside for your future retirement. If total payments into Social Security exceed program costs in a given year, then the excess money is put into trust funds to fund future program costs. If program costs exceed payments in a given year, then money is drawn from the trust funds to pay the difference. More on the financial status of the Social Security programs (and trust funds) later.
CBEI Blog Series: Social Security
Part 1: How it Works and How it is Funded (or not)
Part 2: Who Gets Benefits?
Part 3: How Are Programs Funded?
Part 4: Benefits – How Much Do You Get?
Part 5: Financial Status of Programs
Part 6: The Future
Kevin Bahr is a professor emeritus of finance and chief analyst of the Center for Business and Economic Insight in the Sentry School of Business and Economics at the University of Wisconsin-Stevens Point.