Question

In: Economics

How is social security currently funded?

How is social security currently funded?

Solutions

Expert Solution

Social Security is financed through a dedicated payroll tax.. Employers and employees each pay 6.2% of the wages up to a taxable maximum of $137,700 (in 2020), while the self-employed pay 12.4%.

In 2019, the gross income for Old-Age and Survivors Benefits and Disability Insurance came from payroll taxes at $944.5 billion (89 per cent). The remainder was provided by $80.8 billion (7.6 per cent) interest earnings and $36.5 billion (3.4 per cent) tax revenues from OASDI benefits.

In 2020, 12.4 percent of revenues up to $137,700 will go into the Social Security pot. Job holders and their employers are dividing the contribution by 6.2 per cent each; self-employed people are paying both. That money goes into two trust funds, Old-Age and Survivors Insurance and Disability Insurance, called Social Security. The first provides compensation for the death, spousal and survivor while the second offers expenses for the disability.

Report projects by the most recent trustees that the reserve will be depleted by 2035. That doesn't mean that Social Security is going "broke," as the situation is described sometimes. The Social Security programs will continue to fund compensation from their annual tax income if funds are depleted. However, those payments would be smaller, amounting to around 80 percent of what the beneficiaries would usually be eligible to receive in 2035 and, according to existing estimates, would begin to fall significantly in the following decades.

Social security isn't a plan to save money. What you're paying into the system doesn't go into your pension account. Workers in each generation finance payments from the Social Security to their retired elders and other beneficiaries. Their benefits will in turn be paid for by younger workers down the road.
Medicare also levies FICA and SECA income. Payroll taxes amounting to 2.9 per cent of profits go into various trust funds to support the federal health insurance system for the elderly and the disabled.


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