Just about everyone knows that Social Security is in financial straits. With a demographic rush of baby boomers in or approaching retirement, the number of people collecting benefits hits new records regularly. Meanwhile, retirements mean that there are fewer workers paying taxes to support those benefits. Based on the latest edition of the Social Security Trustees Report from earlier this year, things will come to a head in about 16 years, when imbalances in the amount of income and outflow for the Social Security program lead to the complete depletion of trust fund reserves.
It's natural to think that there'd be obvious signs of Social Security's imminent financial crisis. But when you look at the actual numbers recently, it's surprising to find that Social Security is still making money for now. Even though the current numbers look good, understanding what changes are likely to appear in the years to come is essential in order to consider possible solutions to the problem.
Image source: Getty Images.
Where Social Security gets its money from
Social Security gets its funding from a few different sources, but the biggest by far are the payroll taxes that current workers pay. Employees pay 6.2% of their wages up to a maximum wage base limit each year, which for 2018 is $128,400. Employers also pay a matching 6.2% amount out of their own pockets in Social Security taxes. Those who are self-employed have to cover the full 12.4% total for both employee and employer taxes.
In addition, the Social Security program gets money from the income tax that certain recipients have to pay. If your retirement income -- defined for these purposes as half your Social Security plus all of your outside income -- exceeds certain thresholds, then up to 85% of your benefits can be subject to tax at your ordinary income tax rate. That money funnels through the IRS and into Social Security's coffers.
Finally, Social Security's trust funds have assets that generate interest. Rates are determined based on prevailing market rates, with Social Security invested in special Treasury securities that give the program the access and flexibility it needs to meet its obligations.
In 2017, Social Security brought in $996.6 billion from its funding sources. Payroll taxes made up the lion's share of that amount, collecting $873.6 billion. Interest on the trust fund added $85.1 billion, and taxes on benefits raised $37.9 billion.
How Social Security spends its money
Conversely, Social Security has to pay out benefits and cover its administrative expenses. In 2017, $941.5 billion went toward paying regular retirement and disability benefits to Social Security recipients. In addition, $4.5 billion went to the Railroad Retirement program as a contribution toward the payments that program makes. $6.5 billion was needed for administrative costs. Those numbers add up to $952.5 billion.