For millions of retired workers, Social Security is a financial lifeline that they simply couldn’t do without. Of the nearly 42 million retired workers receiving a monthly benefit check, some 61% rely on that check to account for at least half of their income. That’s huge, and it demonstrates what a critical role Social Security plays in helping seniors make ends meet during retirement.
Last year, in 2016, Social Security collected $957.5 billion in income, of which $922.3 billion was disbursed primarily to retirees, as well as millions of disabled folks, and the survivors of deceased workers. All told, this marked the 33rd consecutive year that Social Security’s asset reserves increased, following the passage of the 1983 Amendments that gradually increased both payroll taxes and Social Security’s full retirement age.
How Social Security generates income
But have you wondered how exactly the Social Security program is able to generate nearly $1 trillion in income each year to disburse out to seniors, their families, the disabled, and survivors? Let’s take a closer look at the three primary ways Social Security generates income.
1. Payroll tax
Without question, the largest source of income for Social Security, and as you’ll see the main reason why the program can never go bankrupt, is the payroll tax. In 2016, $836.2 billion of $957.5 billion (87.3%) was derived from the payroll tax.
Payroll taxes, also known as FICA taxes, are the taxes workers pay on earned income toward Social Security and Medicare. The payroll tax for Social Security is 12.4% on earned income between $0.01 and $127,200, while Medicare is a flat 2.9% on all earned income, without exemption. However, most workers don’t wind up facing the full brunt of Social Security’s 12.4%…