Everyone knows about Social Security. We are either receiving Social Security Benefits ourselves or we know someone who is. If we are working, we see the reduction in our paychecks. But how is Social Security funded? In this article, we will discuss the four sources of income that fund Social Security.
The sources of income for Social Security are payroll taxes, net interest income earned on the assets of the trust funds, taxes assessed on Social Security benefits, and reimbursements from the general fund.
Payroll taxes provide most of the funding for Social Security. The employer pays 6.2% and the employee pays the other 6.2%. If you are self-employed, you pay the employer and the employee share of the tax which equals 12.4%.
Any year when the payroll taxes collected are greater than the amount paid out in benefits, the excess is put into a trust fund. This fund invests the money in U.S. Treasury bonds, which earn interest. Any money in this trust can be used to fund Social Security.
People in higher income tax brackets have to pay taxes on any Social Security benefits they receive. These benefits taxes go into the trust fund. There they will be invested in U.S treasury bonds or used to pay benefits.
Investing in a U.S Treasury bond is loaning money to the U.S government in return for interest. The money raised from investments in the bonds goes into the government’s General Fund. Once it is in the General Fund, the government can use the money any way it wants. When the government pays back the loan, it is called reimbursement from the general fund. The money is now back in the trust and can be used to pay benefits.
These are the four sources of funding for the Social Security Administration. Payroll taxes, interest from the U.S Treasury investments, taxes on benefits, and reimbursements from the General Fund keep Social Security bankrolled.