Social Security: Opting In Or Out?

In the US, Social Security is a mandatory contribution for workers and their employers, who pay 6.2% each in payroll taxes on income below an annual cap, set at $168,600 for 2024. If you're self-employed, you pay the full 12.4%. Social Security benefits grow according to the beneficiary's years of work, income and age. While many people start receiving monthly payments as soon as they are eligible at age 62, experts urge delaying as long as possible if the benefit isn't needed right away. That's because the payment grows by 8% a year until age 70.

Who pays into social security?

In the US, workers and employers jointly fund the Social Security system. Workers pay 6.2% of their earnings up to a cap of $127,200 per year (as of 2017). Employers match this contribution, resulting in a combined contribution of 12.4% of earnings. Self-employed individuals pay both the employee and employer share, amounting to 12.4% of their net income. However, they can deduct half of this contribution as a business expense for income tax purposes.

It is important to note that Social Security is only applicable to earned income, wages, or net income from self-employment. Other sources of income, such as pension payments, annuities, and interest or dividends from savings and investments, are not considered earnings for Social Security purposes.

While most US workers are automatically enrolled in the Social Security program, there are a few exemptions. Members of certain religious groups who waive their rights to benefits and receive care from their religious sect may be exempt. Additionally, nonimmigrant and nonresident foreign academics, researchers, students, and teachers are usually exempt from paying Social Security taxes. Self-employed individuals with annual earnings of less than $400 are also exempt from contributing to Social Security.

What are social security benefits?

Social Security is a government program that provides a source of income when you retire or are unable to work due to a disability. It also offers Medicare, the country's health insurance program for people aged 65 and over, as well as certain people younger than 65, including those with permanent kidney failure.

There are four main types of Social Security benefits:

• Social Security Disability Insurance (SSDI): This provides income for those who are unable to work due to a disability. To qualify, your medical condition must be expected to last at least one year or result in death.
• Supplemental Security Income (SSI): The SSI program provides support to disabled adults and children with limited income and resources, as well as older adults aged 65+ who are not disabled but have limited income.
• Spousal Benefits: Social Security provides benefits to spouses and other survivors of a family member who has passed away. This includes widows, widowers, and dependents of eligible workers.
• Retirement Benefits: These are paid to individuals when they retire, and the payment amount may be influenced by other income sources, such as pension payments and annuities.

It is important to note that only earned income, wages, or net income from self-employment is covered by Social Security. Pension payments, annuities, and interest or dividends from savings and investments are not considered earnings for Social Security purposes, although you may still need to pay income tax on them.

How are social security funds invested?

Social Security trust funds are accounts managed by the US Department of the Treasury. There are two types of funds: the Old-Age and Survivors Insurance (OASI) Trust Fund and the Disability Insurance (DI) Trust Fund. These funds receive payroll taxes, pay out benefits, and invest any surplus in special government securities.

By law, income to the trust funds must be invested daily in securities guaranteed as to both principal and interest by the Federal government. All securities held by the trust funds are "special issues" of the US Treasury. These securities are only available to the trust funds and can be redeemed at any time at face value.

In the past, the trust funds have held marketable Treasury securities, which are available to the general public. Marketable securities are subject to the forces of the open market and may suffer a loss or enjoy a gain if sold before maturity. In contrast, special issues give the trust funds the same flexibility as holding cash.

The interest rate on special issues is determined by a formula enacted in 1960. The rate is determined at the end of each month and applies to new investments in the following month. The average interest rate for the combined OASI and DI Trust Funds was 2.387% in 2023.

The Social Security trust funds had combined asset reserves of $2.79 trillion at the end of 2023. However, the 2024 annual report predicts that the OASI Trust Fund's reserves will run out by 2033 if Congress does not act to address the funding shortfall.

What is the future of the social security trust funds?

The future of the Social Security Trust Funds is uncertain. The Social Security Trust Fund is comprised of two separate funds: the Federal Old-Age and Survivors Insurance Trust Fund and the Federal Disability Insurance Trust Fund. These funds are primarily financed through payroll taxes and are used to pay benefits to retirees, people with disabilities, and their spouses, children, and survivors.

The Social Security Board of Trustees projects that by 2035, taxes will only be able to cover 75% of scheduled benefits. This is due to population aging and lower birth rates. If no changes are made, trust fund assets are expected to be exhausted by 2035, and benefits will need to be lowered. However, adjustments to taxes or benefits could restore solvency to the program.

The Board of Trustees releases an annual report on the financial status of the program, which includes projections for the future. These projections are inherently uncertain and depend on various economic factors and assumptions. According to the 2024 report, the projected reserve depletion date for the combined trust funds is 2035, with the OASI Trust Fund able to pay full benefits until 2033, and the DI Trust Fund projected to pay full benefits until 2098.

To address the expected shortfall, various proposals have been put forward, including reducing government expenditures, increasing taxes, and borrowing. The future of the Social Security Trust Funds depends on the actions taken by policymakers and their ability to ensure the long-term sustainability of the program.

How does social security affect the federal budget?

Social Security is the largest program in the federal budget, typically making up almost one-fifth of total federal spending. In the fiscal year 2018, outlays for Social Security benefits totalled $977 billion, or almost one-quarter of federal spending.

Social Security is funded through a dedicated payroll tax, with employers and employees each paying 6.2% of wages, and the self-employed paying both the employee and employer share of the tax. The program is largely operated on a “pay-as-you-go" basis, with current employers and employees contributing taxes that fund benefits for retired workers and survivors.

The Social Security Trust Fund is projected to grow to a peak of about $4.2 trillion by 2024, at which point Social Security will begin using the fund to help pay promised benefits. The fund itself is projected to run out around 2037. If Congress does not act to address Social Security's finances before the fund is depleted, benefits would have to be cut by an estimated 17-22% because payroll taxes would be lower than benefit outlays, and Social Security is prohibited from borrowing to make up the shortfall.

While Social Security faces financial challenges, it is important to note that it is prohibited from borrowing and must balance its long-term budget. Therefore, it cannot add to long-term federal deficits.

Frequently asked questions