Social Security – The Basics

Social Security is at the forefront of millions of Americans’ minds.  To fully understand Social Security and Social Security benefits you need to understand the system. The current Social Security system works like this: when you work, you pay taxes into Social Security. The tax money is used to pay benefits to:

  • People who already have retired;
  • People who are disabled;
  • Survivors of workers who have died; and
  • Dependents of beneficiaries.

The money you pay in taxes is not held in a personal account for you to use when you get benefits. Your taxes are being used right now to pay people who now are getting benefits. Any unused money goes to the Social Security trust funds, not a personal account with your name on it.

Social Security – The Future

Social Security is a compact between generations. For more than 65 years, America has kept the promise of security for its workers and their families. But now, the Social Security system is facing financial problems, and action is needed to make sure that the system is sound when today’s younger workers are ready for retirement.

Here is why the level of benefits that Social Security will be able to pay in the future is uncertain. Today there are about 35 million Americans age 65 or older. Their Social Security retirement benefits are funded by today’s workers and their employers, who jointly pay Social Security taxes—just as the money they paid into Social Security was used to pay benefits to those who retired before them.

Unless action is taken to strengthen Social Security, in just 13 years we will begin paying more in benefits than we collect in taxes. Without changes, it is estimated that by 2042 the Social Security trust fund will be exhausted. By then, the Social Security: a simple concept number of Americans 65 or older is expected to have doubled.

There will not be enough younger people working to pay all of the benefits scheduled for those who are retiring. At that point, there will be enough money to pay only about 73 cents for each dollar of benefits that retirees are scheduled to receive. We will need to resolve these issues to make sure Social Security will provide a foundation of protection for future generations as it has done in the past.

Social Security is more than retirement

Many people think of Social Security as just a retirement program. Although it is true that most of the people receiving Social Security receive retirement benefits, many others get Social Security because they are:

  • Disabled; or
  • A spouse or child of someone who gets Social Security; or
  • A spouse or child of a worker who died; or
  • A dependent parent of a worker who died.

Depending on your circumstances, you may be eligible for Social Security at any age. In fact, Social Security pays more benefits to children than any other government program. Today, more than 47 million people, about one out of every six Americans, collect some kind of Social Security benefit.

Your Social Security taxes

The Social Security taxes you and other workers pay into the system are used to pay for Social Security benefits.  You pay Social Security taxes on your earnings up to a certain amount. That amount increases each year to keep pace with wages. In 2007, that amount is $97,500.  In terms of the actual tax, for 2007, if you work for someone else, you pay a social security tax of 6.20% of your earnings while your employer also pays a tax of 6.20%.  If you are self-employed, you pay a social security tax of 12.40% of your earnings.

Medicare taxes

You pay Medicare taxes on all of your wages or net earnings from self-employment. These taxes are used for Medicare coverage. If you work for someone else, you pay a medicare tax of 1.45% of your earnings while your employer also pays a medicare tax of 1.45%. If you are self-employed, you pay a medicare tax of 2.90%

Social Security

Where your Social Security tax dollars go

When you work, 85 cents of every Social Security tax dollar you pay goes to a trust fund that pays monthly benefits to current retirees and their families and to surviving spouses and children of workers who have died. The other 15 cents goes to a trust fund that pays benefits to people with disabilities and their families.

From these trust funds, Social Security also pays the costs of managing the Social Security programs. The Social Security Administration is one of the most efficient agencies in the federal government, and we are working to make it better every Social Security tax dollar you pay, we spend less than one penny to manage the program.

The entire amount of taxes you pay for Medicare goes to a trust fund that pays for some of the costs of hospital and related care of all Medicare beneficiaries. Medicare is managed by the Centers for Medicare and Medicaid Services, not Social Security