Social Security has a lot of people worried right now. With tens of millions of Americans collecting benefits right now and many more expecting to do so in the future, the financial strain on the program has increased dramatically in recent years. Demographic shifts have added more people than ever before to Social Security's rolls, and after having built up an impressive multi-trillion dollar balance in trust funds, the federal government projects that it might use up that balance over the next decade and a half.
In trying to figure out what to do, it's vital to know where Social Security's funding comes from right now. Much of the money that goes toward paying benefits comes from a single source, but a couple other key contributors also play a pivotal role. Below, we'll go into more detail about exactly who's paying for your Social Security benefits.
1. Social Security payroll taxes
Social Security's primary funding source is a payroll tax that gets withheld directly from most workers' paychecks. The federal government takes 6.2% of your pay out of your check to cover Social Security, and it also charges your employer a matching 6.2% amount. Those who are self-employed pay the entire combined 12.4% amount as part of their self-employment tax liability. The tax gets imposed on wages and earnings up to a certain maximum amount each year, with 2020's limit set at $137,700.
In 2018, the most recent year for which the Social Security Administration has data, more than $885 billion came into Social Security's coffers through the payroll tax. That represented 88.2% of the total money that Social Security's retirement and disability programs received.
2. Interest on trust fund balances
Decades ago, lawmakers were able to anticipate the demographic challenges that Social Security would face, and so they put into place provisions that would boost the size of the trust funds that support the program. Over time, the trust fund balances built up significantly, and their investment in Treasury securities pays interest income that Social Security uses to pay a portion of its benefit obligations.
Interest earnings accounted for a bit over $83 billion of revenue for Social Security in 2018. That's just 8.3% of the money going toward Social Security, and unfortunately, it's likely to go down in future years when the SSA starts to use part of the trust fund balances to cover shortfalls in other funding sources for benefits.
3. Income taxes on Social Security benefits
Lastly, Social Security gets a relatively small amount of tax revenue from income taxation. The tax laws require Social Security recipients whose incomes exceed certain levels to include a portion of their benefits as taxable income. The resulting income tax that those recipients have to pay gets turned over to the SSA to help cover future benefit payments.
Revenue from taxing Social Security benefits raised about $35 billion in 2018, or 3.4% of the program's overall revenue. Unlike trust fund interest, the amount of money raised by income tax on benefits is likely to go up over time, because income thresholds for taxing benefits aren't indexed for inflation and therefore snare more recipients as time goes by.
What to watch in the future
Many of the proposed solutions for fixing Social Security's financial challenges focus on raising more revenue, and given how important payroll taxes are for the program, it's tempting just to raise payroll taxes to cover shortfalls. With interest on trust funds likely to wane and with little political support for taxing Social Security benefits further, payroll taxes are probably the easiest place to start in looking at possible ways to ensure Social Security's future.