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Where Do Social Security Taxes Go?
For anyone who’s worked into the Social Security system, you’re probably familiar with that tax taken out of your paycheck — federal income taxes that help fund Social Security, among other services. The government relies on these taxes to fund programs like Social Security, which encompasses benefits for retirees, Medicare recipients and people with disabilities. But you may be wondering how exactly your Social Security taxes are being spent, and whether or not you will actually see any of that money returned to you once you retire.
The breakdown of the SSD tax is as follows: 70 cents of every dollar pays benefits to retired people and their families, as well as survivors’ benefits for the spouses and children of people who have died. 19 cents of each dollar go to cover the health insurance of people on Medicare, while the remaining 11 cents fund disability benefits for people who can no longer work and their families. Less than one cent out of each dollar goes to fund the administrative costs of the Social Security Administration, which means paying the people who work there and maintaining the physical property of the SSA (like computers, buildings, etc.).
The benefits paid are different depending on the type of program the person is enrolled in. For example, retirement benefits in January 2017 were $1,360 per month on average, though these amounts change from month to month. Furthermore, if someone chooses to retire early (though the full retirement age is 65 to 67, you can start at age 62), they will actually receive a smaller portion of their retirement benefit each month, but for a longer period of time overall.
When it comes to Medicare, the amount you receive depends on your medical expenses, but it doesn’t cover everything — so you can also opt to purchase Medicare supplement insurance, which is offered by private companies but regulated in price by the government. This insurance covers the expenses that Medicare doesn’t.
Disability benefits, meanwhile, can be up to $2,687 per month in 2017 (the amount changes yearly), though the average payment is $1,171 per month (and some recipients can receive less than this). Disability benefits vary depending on the size of the family you have to support, your expenses and the nature of your disability. Ultimately, it aims to help people who have fallen ill or become injured, or have a chronic condition, and thus can no longer work.
It’s important to note that the money collected from Social Security taxes isn’t funnelled directly into spending — instead, it’s placed into trust funds that distribute it out to the appropriate channels over time. The money drawn for administrative purposes is taken from the trust funds as well, and any taxes collected that aren’t immediately spent are invested. Essentially, the government borrows leftover money from Social Security to carry out its other functions, and this money is eventually paid back with interest.
However, what does all this mean for you as a taxpayer? The main point of consideration is whether you will eventually have access to the money you pay into Social Security once you retire or enroll in Medicare or if you are ever disabled. Currently, according to the 2016 annual report from the Social Security Administration, Social Security has enough funding to fully pay out all benefits until 2034 — so if you’re planning to retire before that, you may be in luck. However, after this date, it only has enough funding to pay 75 percent of their currently scheduled benefits until 2090.
There is still a possibility that this may change if Congress enacts laws that funnel more money into Social Security, which might give you some peace of mind if you estimate that you’ll retire (and live long enough) past 2034. However, it’s important to also prepare for a worst-case scenario and understand that Social Security may not always be able to provide for you in quite the way that you’d like it to.
You can actually calculate the Social Security benefit you’ll receive in the future using the online calculator offered by the Social Security Administration. There, you can enter your age and planned retirement age, your wages over the years, your planned earnings in 2017, and information about your family, all of which will determine how much you will be paid once you retire. You can use this to estimate how much you’ll need to save to experience the quality of life that you want.
That’s why saving for retirement is so important — so make sure that you are following all the necessary steps to have something to fall back on once you are no longer working.