Please ensure Javascript is enabled for purposes of website accessibility

How Is Social Security Funded?

By Jordan Wathen - Updated Oct 4, 2018 at 3:19PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Here's a look into the sources of Social Security's annual funding. Social Security is funded with income from four sources.

Social Security is primarily funded by payroll taxes assessed on wages in the United States. The employer pays 6.2% of income, and the employee chips in another 6.2%. The self-employed, being both employer and employee, pay 12.4% of income into the program. Taxes are only assessed on the first $118,500 of income in 2016.

Just four sources provided the entirety of Social Security's funding in 2014, the last year for which data is available:

  1. Payroll taxes
  2. Net interest income earned by the assets of the Trust (U.S. Treasuries)
  3. Taxes assessed on Social Security benefits
  4. Reimbursements from the General Fund

How Social Security's funding mix has changed

The year 2014 is an excellent year to study, because it represents a fairly typical year for Social Security's funding sources. If you go back to 2011 or 2012, years in which the employee-side of payroll taxes were temporarily cut by 2 percentage points, the funding mix is very different.

And older person sitting at a table, drinking coffee, and looking out the window.

Image source: Getty Images.

Note that the biggest difference between 2012 and 2014 is the change in reimbursements from the general fund. The general fund had to help support Social Security to offset a steep decline in payroll tax revenue due to a 2 percentage point reduction in payroll taxes for the 2011 and 2012 tax years.

Barring a steep recession, it seems unlikely that payroll taxes will be reduced, or that the sources of Social Security's funding will ever again look like they did in the 2012 tax year. From 1990 to 2016, the base payroll tax rate charged to employers and employees was unchanged save for 2011 and 2012. 

How Social Security will be funded in the future

The Social Security Administration's actuaries believe that there is little reason to expect the program's funding sources to change dramatically in the future.

Funding source

Percentage of total funding in 2014

Estimated % of total funding in 2024

Payroll taxes



General fund reimbursements



Taxation of benefits



Net interest income



Source: Social Security Administration's 2015 OASDI Trustees Report. Amounts may not add to 100% due to rounding.

Not surprisingly, an increase in the number of people receiving benefits in 2024 will result in an increase in taxes on benefits. The program's actuaries believe that a smaller pool of assets in the Trust (the Trust is expected to shrink by 6% from 2014 to 2024) will result in lower net interest income. Finally, payroll taxes are also expected to grow at a slightly faster rate than the growth in total funding.

Importantly, as with all projections, the Social Security Administration could be miles off in its estimations. It wouldn't be out of the realm of possibility for payroll taxes to be increased, or expanded by 2024. Furthermore, predicting the general level of interest rates over the next 8 years with any accuracy is a very difficult thing to do. Note that all figures for 2024 are based on its "intermediate" expectations, or the middle estimate between high- and low- estimations.

But despite the inherent uncertainty in predicting the future, there are some things that we can almost certainly say: Payroll taxes will continue to fund the vast majority of the program and an aging population of Boomers will result in more income from taxes on benefits in the future. 

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
S&P 500 Returns

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 07/03/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.