Where does Social Security get its funding

Social Security 7 comments

It’s actually quite simple. There are three main sources. Two are direct taxes paid by citizens and the third indirectly – interest paid to the trust on the Treasury bonds it holds.

Note the net change in asset reserves.

As you can see, the bulk of the revenue is payroll taxes. The next is interest on the trust assets (which is declining as the trust is depleted and bonds are redeemed to pay benefits).

The smallest amount is the income taxes paid by those beneficiaries who have 50% of their SS benefit as taxable income. The income taxes paid on taxed SS benefits above 50% are used to fund Medicare.

About 49% of those collecting Social Security have a portion of their benefits as taxable income.

I paid for my Social Security, why should I pay tax on the benefits too?

If you look at your Social Security account showing the taxes you and your employers paid, you will see that if you started collecting at FRA you receive in benefits an amount equal to all you paid in taxes is less than five years. Add a non-working spouses benefit where no taxes were paid and the time is shorter.

In the aggregate, the actuaries estimate that all Social Security beneficiaries end up paying for about 15% of all benefits paid under the program – hence the maximum 85% taxable benefit.

7 comments

  1. FWIW (Social Security is confusing.)

    Richard:”If you look at your Social Security account showing the taxes you and your employers paid, you will see that if you started collecting at FRA you receive in benefits an amount equal to all you paid in taxes is less than five years. Add a non-working spouses benefit where no taxes were paid and the time is shorter

    In the aggregate, the actuaries estimate that all Social Security beneficiaries end up paying for about 15% of all benefits paid under the program – hence the maximum 85% taxable benefit.”……………..

    SSAhttps://www.ssa.gov/history/taxationofbenefits.html

    “If a rigorous effort is made to identify how much of the average beneficiary’s benefit was directly paid for by the beneficiary, the general answer is about 15%. Or to say it the other way, about 85% of the average Social Security benefit represents an amount in excess of that contributed to the program by the average worker.”

    “Benefits are funded from three sources: the employee’s payroll tax, the employer’s matching payroll tax, and interest earned by the Trust Funds. Only one part of this funding could be said to have been directly paid by the beneficiary.”………….

    Me:My first year as a civilian, I earned roughly $10,000*, and paid about $500 (after tax) and my employers paid $500 untaxed SS contributions. Over the next forty some years, that $1,000 earned compounded, untaxed (or tax deferred?) interest.My first benefit check of $2,000, I suppose, could be the return of four years of my funding “directly paid by the beneficiary,” in which case I likely received back all my “contributions” within five years +/-.

    However, according to me (and the Urban Institute), that employer contribution and the resulting compounded interest was, in fact, a result of my contribution, although not in an individual account, (and not taxed, yet).Which is why UI calculated that I “contributed” $367,000 into Social Security and would then receive about $383,000 in lifetime benefits.

    And why Richard “paid” $1,403,000 and would receive $1,032,000 in lifetime benefits.

    And why we would both be taxed on 85% of those benefits.

    *I wish. Rounded up to make the math easier.

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  2. The Urban Institute has some good points. Maybe “the actuaries” were using one of the older payroll tax rates to calculate (it had to be since the scheme came from the early 80s) or maybe it was just a back of the envelope calculation. Anyway, it doesn’t ring true unless you factor in a stay at home spouse or a divorced wife or disabled adult child. Further, you must live out your live expectancy or beyond.
    The program uses fixed rate bond interest as earnings, so there is no growth there. The program is calculated using income must meet expenses. The only way you can say you pay for 15% of your retirement is by using an inflation amount. If that is the case, then the taxable amount should be adjusted for inflation on an annual basis.

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    1. Hardly think they use wrong rates. Yes it should be adjusted every year based on all the factors involved.

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  3. Or…

    “Let’s keep the first one simple: A single person who made the average wage (about $66,100 in 2023 dollars) and retired in 2020 would have paid about $367,000 into Social Security and would then receive about $383,000 in lifetime benefits.

    It’s worth pointing out that, above a certain level of income, you’ll pay more into Social Security than you’ll get out. For instance, a single person with higher lifetime earnings (about ($105,800 a year) who retired in 2020 would have paid about $588,000 and would receive around $508,000 in lifetime benefits.”

    It depends on your definitions, and assumptions. (key word: “in 2023 dollars”)

    Social Security and Medicare Benefits and Taxes: 2023

    C. Eugene Steuerle Karen E. Smith

    THE URBAN INSTITUTE

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    1. Not at all. I have run many scenarios and they all are ahead of the game in four to six years. I was ahead within six years including employer money. Remember some spouses are collecting on the workers benefit and paid no taxes. I have the maximum FRA benefit which has also been adjusted for 14 years of COLA.

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    2. Not sure what 2023 means as I paid the taxes on the income in the years earned, my earning were adjusted for inflation when my benefits were calculated in 2008 and since have received COLAs in all but one year. My total taxes paid – most on the maximum taxable earnings was $132,700. I honestly don’t see how 2023 dollars are relevant to the taxes paid when what I am receiving in benefits has, at least in theory been inflation adjusted.

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