What Do Social Security Taxes Pay For?

Many people wonder where their Social Security tax dollars go. Generally, out of every dollar you pay in Social Security taxes:

  • 72 cents goes to a trust fund that pays monthly benefits to retirees and their families. That works out to an average monthly benefit of $1,369 or $16,428 a year.
  • 16 cents goes to disabled benefits. The average monthly payment there was $1,172.
  • 9 cents goes to survivor benefits The survivor benefits supplemented the income of spouses and children of deceased workers. They come in handy, since the SSA estimates that one in eight adults in their 20s today will die before reaching retirement age.
  • Less than 1 cent goes to pay for administrative costs.

Money not used to pay benefits and administrative expenses is invested. The U.S. government uses the money it has borrowed from Social Security – just as it uses money you may have invested in savings bonds – to pay for all the services and projects it provides. And just as the government pays you interest on your bonds, it says it will make good on its obligations to Social Security.

Each year, Social Security’s Board of Trustees reports on the financial status of the Social Security program. These reports are valuable tools for evaluating and ensuring the economic health of the Social Security system.

Will Social Security be Available When I retire?

Yes, if you are 50 or older right now. Under that age? Maybe, maybe not.

As massive as the Social Security fund is, it’s not massive enough. Demographic trends show more people will be retiring and taking money, while fewer will be working and contributing money.

The trust funds are predicted to grow through 2021. After that, the total cost of the program is expected to exceed its income.

Lawmakers have long known that reforms are necessary, but politicians have been petrified at the voter backlash that might ensue if they tinker with the program. But the clock is ticking, and the SSA predicts it will strike midnight in 2034.

That’s when the reserve funds will be depleted and total revenue will not exceed the payouts. The only option then will be to cut benefits to around 75% of what workers were scheduled to receive.

If that happens, the SSA says it will be able to pay benefits until 2090. So that’ll be your kids’ and grandkids’ problem.

What is FICA?

From the time they looked at their first paycheck, every American has seen a four-letter acronym – FICA – taking their hard-earned money. Not many know what it stands for, much less where all their money is going.

FICA is short for the Federal Insurance Contributions Act.

Most Americans know it simply as the Social Security and Medicare taxes, which take thousands of dollars annually from their paychecks.

In 2018, employers and employees will each pay 6.2 percent of wages up to $128,400. If you make the maximum taxable amount you will have $7,960 deducted from your earnings. Your employer matches that, so the Social Security Administration gets $15,920.

The average American worker makes about $50,000 in 2018, so their contribution to FICA is $3,224. With the employer match, Social Security picks up $6,448.

Where Does Money Collected for Social Security Go?

The quick answer is into the government’s massive retirement fund for American workers. How massive is it?

Since its inception, FICA has collected $19.9 trillion for Social Security and Medicare.

Congress enacted FICA in 1935. There were various state and local retirement funds at the time, but lawmakers decided workers needed a national safety net to keep them from spending their retirement eating cold beans every night for dinner.

The fund would also cover people who were disabled before reaching retirement.

The Social Security Board of Trustees annual report said that $957 billion was collected in 2017. The Social Security Administration (SSA) paid $922 billion in benefits.

That $35 billion surplus was put into trust funds to cover future payments. The Trustees reported the total asset reserves in the trust funds were $2.85 trillion, which seems like a lot of money, and it is, but with people living longer, more benefits are going out and there are questions about whether there will be enough for your descendants.

How Is Social Security Funded?

It’s called a “contribution,” like something you’d voluntarily give to charity, but with FICA, you have no choice in the matter. By law, employers must deduct FICA taxes from their weekly payroll.

In fact, more than 85% of Social Security funding comes from payroll taxes. The other sources of funding are interest earned on the assets in the Social Security trust fund (11%); taxes on Social Security benefit (3%); and reimbursements from the General Fund, which amount to zero.

Will Social Security Alone Take Care of Me in Retirement?

Short answer – No. For one thing, it’s not intended to.

FICA was designed to cover 40% of a worker’s previous income. The worker was supposed to come up with the other 60% themselves.

The problem is that not enough people understood how little of their retirement Social Security actually covers. More than 74% of unmarried elderly people count on Social Security for half or more of their monthly income. Another 47% rely on it for at least 90% of their monthly income.

That shows how important it is to have a retirement fund outside of Social Security.

How much Social Security will you receive?

It depends on how much you paid in FICA taxes, your birth year and when you decide to begin receiving benefits.

The maximum monthly payout in 2018 is $2,788 per month, or $33,456 a year. The size of your check will depend on how much FICA tax you’ve paid, your birth year and when you decide to retire.

To qualify for any pay, you must have at least 40 credits. Americans receive one credit for each $1,320 they earn in 2018, and they get up to four credits per year.

That doesn’t mean that if you earn four credits for 10 years you can saddle up and head into the retirement sunset. The earliest you can do that is age 62. Though the longer you wait, the more money you’ll receive.

Full retirement age varies from 65 to 67, depending on what year you were born. If you were born between 1943 and 1954, your full retirement age is 66.

If you want to retire at 62, you will receive 70% of full retirement benefits. The penalty decreases every year until you reach full retirement age.

If you wait until after you reach full retirement age to start receiving benefits, they will increase. If you wait until age 70, you will get 32% more than what you would have if you’d started at age 67.

As for how much you’ll get, it gets a little complicated. The formula takes your highest-earning 35 years, divides that total by 420 months (35 years) to find your average indexed monthly earnings, or AIME.

Your benefit is then based on a three-tiered percentage of your AIME. We could explain further, but your head is probably already spinning.

The simplest way to calculate your future Social Security earnings is to vist our Social Security Retirement Income Calculator. Enter wages, age and planned retirement age, for yourself and your spouse and see an estimate of how much income you can expect to receive when you retire.

In addition to predicting your future Social Security income, you should determine how much money you need to save within retirement accounts. Use our How Much Will I Need To Save For Retirement Calculator to determine your total savings goal.

American retirement savings data show that most people are not saving enough and have to put off retirement or forgo it completely.

What If Social Security Is My Retirement Plan?

Do everything possible to keep that from happening. Americans are trying, though there’s plenty of room for improvement.

The country’s retirement score was 80, according to the 2018 Fidelity Investments biennial Retirement Savings Assessment study. That meant the typical saver was on target to have 80% of the income Fidelity estimated they will need for retirement.

That’s up from a score of 62 in 2005, but the study also revealed that half of the 3,100 people surveyed probably won’t have enough to cover essential retirement expenses.

A 2017 report by the Economic Policy Institute is even grimmer. It found the median retirement savings for American families with some savings was $60,000.

As insufficient as that number is, the report said half of American families have zero retirement savings. Coupled together, that meant the median for all U.S families was $5,000.

Social Security cannot make up for that shortfall. The only strategy is to get your financial house in order and start saving more.

  1. ND. Where do Social Security Taxes Go? Retrieved from https://www.nasi.org/learn/socialsecurity/where-taxes-go
  2. 2018, January 31. Fidelity Study: America’s Retirement Score Improving. Retrieved from https://www.fidelity.com/about-fidelity/individual-investing/americas-retirement-score-improving
  3. Hinkle, M. 2017, July 13. No Change for Social Security Combined Trust Fund Reserves Depletion Year Says Board of Trustees. Retrieved from https://www.ssa.gov/news/press/factsheets/HowAreSocialSecurity.htm