For more than 25 million retired workers, Social Security currently represents their primary form of income. With tens of millions of baby boomers yet to retire, and many entering retirement with insufficient savings, you can probably count on this figure rising in the years and decades to come. There's no question that Social Security's importance is growing.

Yet the latest report from the Social Security Board of Trustees shows that America's most important social program is also struggling. Even with $2.89 trillion in asset reserves as of the end of September 2017, the Trustees predict that Social Security's Trust will begin paying out more in benefits than it's collecting in revenue by 2022, ultimately resulting in the complete depletion of its asset reserves by 2034. An estimated $12.5 trillion budget shortfall between 2034 and 2091 may lead lawmakers to cut benefits on current and future retirees by as much as 23% to preserve the program. 

Two Social Security cards laid atop a pay stub, highlighting payroll taxes paid.

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Social Security's payroll tax plays an important role in its longevity

How's Social Security funded, you ask? The smallest component is the taxation of benefits, which provided $32.8 billion of the $957.5 billion collected in 2016. Individuals making more than $25,000 annually, and couples earning more than $32,000, who are receiving Social Security benefits may be subject to having a portion of their benefits taxed by the federal government.

Second, interest income earned on the Trust's $2.89 trillion in asset reserves came to $88.4 billion last year. Nearly all of Social Security's assets are invested in special-issue bonds, and to a lesser extent certificates of indebtedness. As of Sept. 2017, the weighted yield on these bonds and certificates of indebtedness was 2.9%. 

The most important component for Social Security is its payroll tax of 12.4% on earned income. Payroll tax accounted for 87.3% of the $957.5 billion the program collected in 2016. In 2018, earned income between $0.01 and $128,700 will be subject to Social Security's payroll tax, with earned income above and beyond this amount excluded from it. It's worth pointing out that most workers aren't exposed to the full brunt of this 12.4% payroll tax. If you're employed by someone else, your employer covers half of your obligation (6.2%), with the worker responsible for the remainder (6.2%). The self-employed, though, are stuck with the full 12.4%.

The fact that the payroll tax exists, and that it's collected on the earned income of working Americans, ensures that the program can never go bankrupt. In other words, Social Security will always collect revenue to distribute to eligible beneficiaries. That doesn't mean a benefits cut won't be necessary at some point, but it does mean bankruptcy concerns are unfounded.

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What will the average American owe in Social Security payroll tax next year?

Social Security's payroll tax hasn't budged from 12.4% since 1990, which means there haven't been too many surprises for working Americans with regard to how much they'll owe each year for almost three decades. The biggest change tends to be to the maximum taxable earnings cap (the aforementioned $128,700 figure in 2017), which is tied to the National Average Wage Index. In more years than not, higher-income folks can find themselves paying more into the system if the maximum taxable earnings cap increases. In the upcoming year, higher-income individuals who earn at least $128,700 annually will pay either $93 or $186 more into Social Security for the full year, depending on whether they're employed by someone else or self-employed, than they did in 2017.

Meanwhile, more than 90% of workers are taxed on every dollar they earn (i.e., they earn less than the maximum taxable earnings cap each year), so the only change in what they owe is based on their annual income.

So, what's the average American liable to pay in Social Security payroll tax in 2018? According to data from the Social Security Administration, the average wage in 2016 was $46,662.59. If the average American is employed by someone else, he or she is on track to owe 6.2% of this $46,662.59, or $2,893.08. However, if our average American is self-employed, his or her obligation into Social Security would double to 12.4%, or $5,786.16 in 2018.

A golden key laying on top of two Social Security cards.

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The big debate surrounding Social Security's payroll tax

The payroll tax may also hold the key to fixing Social Security's steep budget shortfall between 2034 and 2091. The solution, as proposed by Democrats on Capitol Hill, is to lift or remove entirely the maximum cap on the payroll tax. In other words, instead of capping the tax at $128,700, expose all earned income to the payroll tax, or perhaps earned income above $400,000 with a moratorium in between $128,700 and $400,000. Doing so, Democrats suggest, would potentially eliminate the entire $12.5 trillion shortfall.

On one hand, it would only seem right to make higher-income workers pay into Social Security on every cent they earn like a majority of working Americans. Then again, the reason the cap exists is that the Social Security Administration limits the monthly payout at full retirement age to $2,788. It's potentially unfair to tax, say, $2 million in income at 6.2% or 12.4% if the individual won't receive one red cent extra in benefits come retirement.

Expect Social Security's payroll tax to be a hot, but touchy, subject as Congress looks for a way to shore up the program for future generations.

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