Feb. 1, 2005 — -- How is the system financed?
Social Security is financed primarily through a payroll deduction tax. Employers and employees each pay 6.2 percent (for a total of 12.4 percent) of wages up to $90,000 (for 2005). The self-employed pay the full 12.4 percent.
What is the "Social Security Trust Fund?"
The trust fund is actually financial accounts in the U.S. Treasury. Technically, there are two separate funds, the Old-Age and Survivors Insurance fund, which pays retirement and survivor benefits, and the Disability Insurance fund, which pays disability benefits.
Social Security taxes and other income are put into these Treasury accounts and are then used to pay Social Security benefits. Funds not needed to pay current beneficiaries are invested in special Treasury bonds guaranteed by the U.S. government. This allows the government to use the trust fund money for other government programs such as paying for discretionary spending or paying down the debt.
What is the significance of 2018?
That is the year when the money coming in from payroll taxes will be less than the amount Social Security pays out to beneficiaries, according to Social Security trustees. At this time, the federal government will have to provide cash from general revenues to pay Social Security benefits versus using surplus cash from the Social Security trust fund to pay for other government spending.
What is the significance of 2042?
According to the Social Security Trustees, this year marks when the trust fund will be exhausted and, under current law, Social Security will pay out approximately 70 percent of estimated benefits.
What about all these different years? On Jan. 31, the non-partisan Congressional Budget Office released revised projections for Social Security. It concluded that the payments to beneficiaries will exceed revenue from payroll taxes in 2020 (not 2018) and that the trust fund will be exhausted in 2052 (not 2042). The director of the CBO told The Washington Post that the revisions are economically insignificant.
In 2005, more than 48 million Americans will receive approximately $509 billion in Social Security benefits.
Viewed as percentages:
Nearly 159 million workers, or 96 percent of all workers, are covered under Social Security.
Life expectancy of a 65-year-old:
Source: Social Security Administration