Where Do My Social Security Tax Dollars Go? A Breakdown by Percent

What Do Social Security Taxes Pay For?

Social Security cards on top of stack of 100 dollar billsMany people wonder where their Social Security tax dollars go. Generally, for of every dollar you pay in Social Security taxes:

  • 85 cents goes to a trust fund that pays monthly benefits to retirees and their families. That works out to an average monthly benefit of $1,430.73 or $17,168.76 a year.
  • 15 cents goes to disabled benefits. On average, Social Security Disability Insurance payments range between $800 and $1,800 per month in 2021. However, the maximum benefit you could receive was $3,000 a month. The SSA will determine your monthly payment based on your lifetime average earnings before you became disabled. If you receive other government benefits (worker’s compensation, public disability benefits, etc.), your monthly SSDI could be reduced.
  • Less than 1 cent goes to pay for administrative costs, making the Social Security Administration one of the most efficiently run arms of the Federal Government.

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 that it provides. Just as the government pays you interest on your bonds, it says it will honor 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. Younger than that age? Maybe, maybe not.

And even if it is still functioning, it likely won’t pay out enough income for you to comfortably retire. That means you need to plan accordingly and start saving as much as possible by contributing to retirement accounts such as an IRA or a 401(k).

As massive as the Social Security fund is, it’s not massive enough to allow you to retire comfortably. Demographic trends show that more people will be retiring and taking money in the coming years, while fewer will be working and contributing to the fund.

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.

Sadly, that means workers who have paid into the fund for decades likely won’t be able to reap the benefits of the system and collect funds for retirement.

By 2034 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, in essence they are simply kicking the problem down the street and making it 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 2020, employers and employees will each pay 6.2% of wages up to $137,700. If you make the maximum taxable amount you will have $8,537 deducted from your earnings. Your employer matches that, so the Social Security Administration gets $17,074.

The American worker makes $48,672 on average in 2021, so their contribution to FICA is $3,723. With the employer match, Social Security picks up $7,446.

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 more than $20 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 and stuck eating cold beans every night for dinner.

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

The Social Security Board of Trustees 2020 annual report said that $1.062 billion was collected. The Social Security Administration (SSA) paid $1.059 billion in benefits. The costs are projected to exceed the income by 2021 and in the years to come, sounding the alarms for future generations.

That $3 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 2020, federal payroll taxes generated $1.24 trillion or 5.9% of the gross domestic product (GDP). That $1.24 trillion accounted for 35.9% of all the federal revenues.

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 on whether Social Security will take care of you in retirement is “NO!”

For one thing, it was never 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 through savings and investments.

The problem is that not enough people understood how little of their retirement Social Security actually covers. Some 70% of unmarried elderly people count on Social Security for half or more of their monthly income. Approximately 21% of married couples and about 45% of unmarried elderly person rely on social Security 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 payout in 2021 for someone who files at age 70 is $3,895 per month, or $46,740 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 $1,470 they earn in 2021, 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.

In the U.S., full retirement age is 66 years and two months for those born in 1955, and it gradually increases to 67 for those born in 1960 and after. Full retirement age varies among countries, typically ranging between 65 and 67 years old.

If you want to retire at 62, you will receive just 70% of your full retirement benefits. The penalty decreases every year until you reach full retirement age (66 years and two months).

If you wait until after you reach full retirement age to start receiving benefits, the funds will increase. If you wait to retire until age 67, you will get 108% of the monthly benefits because you delayed getting benefits for 12 months. If you can work longer and retire at age 70, you’ll get 132% of the monthly benefits for 48 months.

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 visit 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 to correct that flawed strategy, though there’s plenty of room for improvement.

The country’s retirement score was 83, according to the 2021 Fidelity Investments biennial Retirement Savings Assessment study — a three-point improvement over a similar study done three years earlier. That score falls into the “good” zone. That score means the typical saver was on target to have 83% of the income Fidelity estimated they will need for retirement.

That’s up dramatically 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 2019 report by The Motley Fool is even grimmer. It found the average retirement savings for American families with some savings was just $65,000.

As insufficient as that number is, there are many other Americans who are headed for disastrous retirements in terms of financial aspects because of their lack of savings. One in four Americans have zero retirement savings, and among the others who are putting money away are likely under-saving. Coupled together, that meant the median for all U.S families was just $5,000 in savings.

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


Sources

N.A. (2021, May 25) Understanding the Benefits — Social Security. Retrieved from https://www.ssa.gov/pubs/EN-05-10024.pdf

Fiorillo, S. (2021, February 19) The Average Income in the U.S. Retrieved from https://www.thestreet.com/personal-finance/average-income-in-us-14852178

N.A. (2020, April 22) The 2020 Annual Report of the Board of Trustees of the Federal Old Age and Survivors Insurance and Federal Disability Insurance Trust Funds. Retrieved from https://www.ssa.gov/oact/tr/2020/tr2020.pdf

N.A. (2020, April 17) Policy Basics: Federal Payroll Taxes. Retrieved from https://www.cbpp.org/research/federal-tax/federal-payroll-taxes

N.A. (ND) Social Security Fact Sheet. Retrieved from https://www.ssa.gov/news/press/factsheets/basicfact-alt.pdf

N.A. (2020) America’s Retirement Score: In the Green. Retrieved from https://www.alphaky.com/sites/aaronammerman.us1.advisor.ws/files/documents/americas_retirement_score_0.pdf

Caporal, J. (2021, June 16) Average Retirement Savings in the U.S.: $65,000. Retrieved from https://www.fool.com/research/average-retirement-savings/