The Social Security program has been funded through payroll taxes since January 1937, about 1 1/2 years after the Social Security Act was signed. The breakdown of earnings on your pay statements and Form W-2 shows the amount withheld for Social Security tax.
How the Social Security System Works
The system is set up by the government such that workers pay taxes to fund Social Security benefits. However, contrary to what many believe, there are no coffers set aside for you. The tax money is used to pay Social Security benefits to those who are receiving payments now. According to the 2019 SSA publication, “Understanding the Benefits,” the funds are used to disburse payments to current retirees, the disabled, survivors of deceased employees and beneficiary dependents. Unused funds are saved in a Social Security trust.
The Social Security Tax Threshold
An income threshold is set every year for the Social Security tax withholding. Once a worker reaches that limit, the deductions cease for the remainder of the year. While that may sound like good news, the flip side is that earnings above the threshold are not included in earnings toward the benefit. Looking at the Social Security wages column on your W-2 Form, you may also notice that any pretax benefits such as medical, dental or vision care premiums are excluded from the earnings factored into your benefits. For 2019, earnings beyond $132,900 are not subject to the SS payroll tax. There is no limit set for Medicare tax deductions.
What To Expect in the Future
On the official government website, the SSA cautions that a depletion of reserves is projected by 2035. The agency is specific about the anticipated shortfall, stating, “Payroll taxes collected will be enough to pay only about 80 cents for each dollar of scheduled benefits.” This is a better report than that of one year ago when the deficiency was expected to occur even earlier. The date anticipated then was 2034, and it was estimated that funding would be available for only 77% of the benefits scheduled. As noted, the taxes collected from workers feed into the benefits currently disbursed. Therefore, the shrinking workforce as more baby boomers retire is a contributing factor to the projected deficit.
Qualifying for Social Security benefits
To qualify for Social Security, the recipient must earn credits through working. With the exception of survivor and disability beneficiaries, the requirement for most people is a minimum of 40 credits earned over the course of their working life. In 2019, $1,360 is worth one credit, and up to four credits may be earned per year. However, it is important to note that it is neither the earned credits nor the amount of taxes deducted by Payroll that factors into the benefit calculation. The benefit is based on average earnings over your life. That is why it is critical to review your annual earnings record for accuracy, which is accessible to those who register on the SSA website.
Related articles: