How is Social Security Funded?
Social Security is primarily funded through payroll taxes. When individuals earn income, they pay a portion of that income into the Social Security system through the Federal Insurance Contributions Act (FICA) tax. As of 2023, the employee pays 6.2% of their wages up to a certain limit, while employers match this contribution, bringing the total to 12.4% on earnings.
Self-employed individuals fund Social Security by paying both the employee and employer portions of the tax, totaling 12.4% of their net earnings. This tax is vital for maintaining the Social Security Trust Fund, which supports various benefits, including retirement, disability, and survivors’ benefits.
In addition to payroll taxes, other sources of funding include interest earned on the Trust Fund’s reserves and taxation of benefits for higher-income individuals. Currently, up to 85% of Social Security benefits can be taxed for those whose combined income surpasses certain thresholds.
The Social Security Administration reviews these funding mechanisms regularly to ensure the program's sustainability and to address any future funding challenges, such as demographic shifts and increasing life expectancy. Understanding how Social Security is funded is crucial for effective retirement planning.