What is Social Security?
When we work, we pay taxes into Social Security. The taxes we pay into the system are used to pay Social Security benefits to:
- People who have already retired;
- People who are disabled;
- Survivors of workers who have died; and
- Dependents of beneficiaries.
The money we pay in taxes is not held in a personal account for us to use when we are eligible for benefits in the future. The taxes that we pay into Social Security are being used immediately to pay people who are receiving benefits now. Furthermore, any unused money goes to the Social Security trust fund, not to a personal account with our name on it.
It is also important to understand that Social Security benefits were never meant to be the only source of income for people when they retire, become disabled, or die. Specifically, Social Security replaces about 40% of an average wage earner’s income after they retire. To have a comfortable retirement, Americans need much more than just Social Security, they also need private pensions, savings, and investments.
Social Security and Medicare Taxes
In addition to paying a Social Security tax when we work, we also pay Medicare taxes on all of our wages (or net earnings if self-employed). These Medicare taxes are used for Medicare coverage.
Generally, if you make less than $117,000 / year, and you work for someone else you pay 6.2% Social Security tax and 1.45% Medicare tax, while your employer also pays 6.2% Social Security tax and 1.45% Medicare tax.
However, if you are self-employed and make less than $117,000 / year, you serve as the employer and employee and pay 12.4% Social Security tax and 2.9% Medicare tax.
Where do our Social Security and Medicare Tax Dollars go?
When we 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);
- 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).
Less than 1 cent of every Social Security tax dollar you pay is used to manage the Social Security program.
Alternatively, the entire amount of taxes we pay into 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 & Medicaid Services (CMMS), not Social Security. But individuals apply for Medicare at Social Security.
Many of the views expressed in this article were taken from www.socialsecurity.gov.