Social Security (Part 1): A Simple Concept
Social Security reaches almost every family, and at some point will touch the lives of nearly all Americans. Social Security helps not only older Americans, but also workers who become disabled and families in which a spouse or parent dies.
According to the U.S. Social Security Administration (SSA), about 160 million people work and pay Social Security taxes and about 52 million people receive monthly Social Security benefits. Most of the beneficiaries are retirees and their families—about 36 million people.
However, Social Security was never meant to be the only source of income for people when they retire. According to the SSA, Social Security replaces about 40% of an average wage earner's income after retiring, and most financial advisors say retirees will need about 70-80% of their work income to live comfortably in retirement. To have a comfortable retirement, Americans need much more than just Social Security. They also need private pensions, savings, and investments.
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
- 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 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
- A spouse or child of someone who gets Social Security
- A spouse or child of a worker who died
- 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.
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 2010, that amount is $106,800.
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 | Social Security Tax | Medicare Tax |
|---|---|---|
| You pay | 6.2% | 1.45% |
| Your employer pays | 6.2% | 1.45% |
| If you are self-employed | ||
| You pay | 12.4% | 2.9% |
Where Your Social Security Tax Dollars Go
When you work, $0.85 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 $0.15 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. Of each Social Security tax dollar you pay, the SSA spends 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.
U.S. Social Security Administration. (Updated 2014, January). In Understanding the benefits (SSA Publication No. 05-10024). Retrieved October 10, 2016, from http://www.socialsecurity.gov/