Social Security: It’s Healthier Than You Might Think!

Each year, Social Security’s Trustees report to Congress on the financial status of the program. This typically generates a number of anxiety-provoking media headlines about if/when it will run out of money. Gail Buckner, CFP, our personal retirement and financial planning strategist, takes a look at the facts. She says Social Security is actually in pretty good shape overall.

Some of the recent headlines about Social Security’s financial condition might give you the impression the entire program is going broke. On the contrary, in some ways its financial condition is actually better than it was last year!

To understand this, it’s helpful to know a few facts about how the program works.

The Basics: Who Pays What

The Social Security taxes we pay go into two “trust funds.” The largest is used to pay “Old Age and Survivor Insurance,” or OASI. This includes monthly checks sent to retirees as well as survivor benefits provided to spouses and minor children of workers who have died. As its name implies, the “DI,” or disability insurance fund, makes payments to individuals who are no longer able to work. Together these are referred to as the OASDI funds. However, separate projections are made for each.

Most of the payroll tax the government collects ends up in the OASI trust fund. A smaller portion goes into the DI fund. Under a law passed in 2015, Congress directed Social Security to divert some of the money earmarked for the “retirement” fund to the “disability” fund, which was in danger of becoming insolvent thanks to higher-than-expected benefit claims. This transfer stops in 2022.1

The assets in both trust funds are invested in US Treasuries that pay a market-based interest rate. Last year, Social Security received $39.9 billion in interest, which was added to its reserves.2

Social Security tax only applies to earned income, that is, income from a job. Dividends, capital gains, interest on bank accounts, rent payments you may receive and similar types of income are not subject to the 12.4% tax. In addition, there’s a limit on how much earned income is subject to Social Security tax. This year, the maximum is $128,400.3

Most of us don’t pay the full 12.4% payroll tax. Generally, workers pay half (6.2%), and their employers contribute the other half. Only those who are self-employed (who are both “employer” and “worker”) pay the entire 12.4%. (Note, there is an additional 1.35% Medicare tax).