Are you counting on Social Security benefits to support you when you retire? If so, are you sure you qualify? Wait, what? Everyone doesn’t just automatically get Social Security when they reach age 65? Hate to break it to you but sadly they don’t. And in fact, the age for full retirement benefits has also gone up to 67 for most people. Additionally, many individuals don’t understand that Social Security disability benefits are also paid for from the same fund. So, who’s paying for all this?
Good question! And it’s one that a reader of ours recently submitted as well:
“How are Social Security disability benefits paid for? Are they really free?”
The answer is no, they’re not free. Unfortunately, like many things in life, you have to earn them. But they’re worth it!
How Does Social Security Work?
To understand how Social Security finds funds, it helps to first understand how the program works on a fundamental level.
Basically, nearly every American participates in Social Security at some point in their life. Typically, it’s first as a worker and then as a recipient. The program is set up as a sort of exchange, such that the able-bodied help subsidize Social Security while working. And then at some point, if an individual becomes disabled or aged, they become a beneficiary.
In order to benefit from this “income insurance,” however, you will have to contribute to the system. And how do you do that? Social Security taxes.
How is Social Security Paid for With Taxes?
Today’s Social Security basically functions as follows: When you work, you pay taxes into Social Security. Then the Social Security Administration (SSA) uses that money to pay for retirement, disability, and survivor’s insurance programs.
As of June 2021, about 176 million workers paid Social Security taxes and about 65 million people received monthly SSA benefits.
People of all ages may qualify for different SSA benefits — including children of a deceased parent and disabled adults. But the majority of funds actually go to support the elderly and retired. In fact, of the 65 million people receiving SSA benefits, about 50 million of those are retirees and their families.
But Social Security was never meant to be the sole source of income for retired individuals. It’s a supplement that guarantees a retiree a portion of their pre-retirement income. The amount you receive depends on how much you paid into the system, and when you opt to start benefits.
In 2022, if you’re at “full retirement age” (FRA) you’ll receive around 55% of your pre-retirement salary for low-income earners. That drops to 41% for medium income and around 27% for maximum earners. If you delay retirement, you’ll make more. If you take early retirement (like age 62), you’ll get 0.5% less for each month you are before your FRA.
Full retirement age varies by when you were born but is currently 67 for people born after 1960. You can check your FRA in a chart provided by the SSA. However, if you’re born before 1955, know that you are already at a qualified FRA.
How Much Am I Paying Into Social Security?
Some people may complain it doesn’t seem fair to be paying taxes for other people’s benefits. However, they rarely complain when they’re disabled or able to retire and not be broke.
Plus, Social Security caps the actual amount you’re paying into the Old Age, Survivors, and Disability (OASDI) program while working. In 2022, you only pay taxes up to $147,000 of earnings. If you work for a company, you pay 6.2% of your wages, and your employer will match that. That means you’ll pay no more than $9,114 out of pocket annually if you reach the taxable maximum.
If you are self-employed, however, you pay 12.4% (because you’re effectively paying the employer portion yourself). So, the max you’ll pay jumps to $18,228.
Additionally, all workers are paying a small percentage to support hospital insurance (Medicare Part A). There is no salary “cap” on that, and employed workers pay 1.45% of their income annually, while self-employed pay 2.9%.
Where Does the Money I’ve Paid for Taxes Go?
In 2022, the money you pay in Social Security taxes goes directly into a trust fund. About 85 cents of every dollar you pay goes towards monthly benefits for current retirees and their families. This includes payments to surviving spouses and children of workers who have died. About 15 cents goes into a trust fund that pays benefits to people with disabilities and their families.
Last year, $980.06 billion (90.1%) of total Old-Age and Survivors Insurance and Disability Insurance income came from payroll taxes. The rest came from interest earnings on the OASDI $2.9 trillion trust fund balance — around $70.1 billion (6.4%). That balance accrued over the past 30 years and has been wisely invested in interest-bearing Treasury securities. This helps protect the program’s viability and longevity.
And don’t forget people getting OASDI have to pay taxes on their benefits. So that accounted for another $37.6 billion (3.4%) of overall Social Security financing.
The costs for managing these programs also comes from these trust funds. However, the SSA is one of the most efficient government agencies in existence. For every $1 you pay in taxes, you’re paying less than a penny for the management of these vital programs.
How Do I Become Eligible for Social Security Benefits?
Only people who’ve paid into the system can draw from it, but currently 94% of U.S. workers will qualify. So, it’s a program worth protecting.
Your Social Security number is your link to eventual benefits. The SSA uses your number to track your earnings while you’re working, and your benefits when you’re collecting.
You become eligible for Social Security benefits by earning “work credits.” In 2022, you need to earn $1,510 for one credit. You can get up to four credits per year and generally need 40 credits to qualify for benefits. That means you need to work at least 10 years to get any Social Security benefits. Young disabled workers or eligible family members of deceased workers are the exception and may qualify at lower credit levels.
So, all of that to say, no. Social Security benefits are not free. However, most adult workers who have participated in the system will find that they have coverage if they’ve accrued enough work credits over their years of employment.
And knowing that you’ll have that security waiting for you when you need it is definitely a solid work incentive.
Kimberly Dawn Neumann
Kimberly Dawn Neumann is a multi-published NYC-based magazine and book writer whose work has appeared in a wide variety of publications ranging from Forbes to Cosmopolitan. She graduated summa cum laude from the University of Maryland, College of Journalism. For more, visit: www.KDNeumann.com, Instagram @dancerscribe, and Twitter @KimberlyNeumann