How Is Social Security Funded?

Social Security is primarily funded through payroll taxes. If you’ve ever looked at your paycheck stub and wondered where that 6.2% deduction goes, that’s it—it’s your contribution to Social Security. Your employer matches that amount, so a total of 12.4% of your wages (up to $176,100 in 2025) goes into the system. If you’re self-employed, you pay the full 12.4% yourself.

These taxes fall under the Federal Insurance Contributions Act (FICA), and while FICA also includes Medicare contributions, I’m going to focus specifically on the Social Security part for this discussion.

It’s important to understand that Social Security operates on a pay-as-you-go system. That means the taxes being deducted from your paycheck right now aren’t being saved in an account with your name on it. Instead, they’re funding the benefits of current retirees.

Where Does the Money Go? Trust Funds Explained

There are two trust funds that handle these payments:

• Old Age Survivors Insurance (OASI) Trust Fund, which supports retirees, their families, and survivors of deceased workers
• Disability Insurance (DI) Trust Fund, which supports disabled workers and their families

Payroll taxes feed into these trust funds, and they’re also supplemented by taxes on Social Security benefits. Yes—up to 85% of your Social Security benefit can be taxable if you have other sources of income. The taxes on the first 50% of benefits go right back into Social Security, and the remaining 35% is used for Medicare.

Social Security Investments: Where the Surplus Goes

When there’s a surplus in these trust funds, it doesn’t just sit there. It’s invested in special U.S. Treasury securities. These investments are considered risk-free and earn interest, which is added back into the trust funds. That interest is paid twice a year—on June 30 and December 31—and in smaller amounts throughout the year when bonds are redeemed.

Some critics argue that this allows the government to “borrow” from Social Security to fund other programs. While that’s technically true, it’s important to note that these bonds are guaranteed by the U.S. government and earn interest for Social Security.

The Real Challenge: Demographics

The biggest challenge isn’t fraud or mismanagement—it’s demographics. With more people retiring and fewer workers paying into the system, we’re approaching a tipping point. By the mid-2030s, the trust funds are projected to be depleted. That doesn’t mean Social Security will vanish—it just means incoming payroll taxes will only be able to cover about 75-80% of promised benefits.

To fix this, Congress could take a number of steps: raise payroll tax rates, lift the income cap, adjust the full retirement age, or find alternative revenue streams. None of these solutions are painless, but something will need to change.

Is Social Security Efficient?

Actually, yes. Administrative costs are impressively low—about 0.7% of total program spending. In 2023, Social Security paid out $1.35 trillion in benefits, accounting for roughly 22% of the federal budget. However, that year it ran a $41 billion deficit, drawing down its reserves.

When we look closer, about 68% of Old Age Survivors Insurance benefits go to retired workers. The rest supports spouses, widows, and other family members. For the Disability Trust Fund, 94% of benefits go directly to disabled workers.

Misconceptions About Social Security

Let’s address one of the biggest myths: that the government has “raided” Social Security. While the system does invest in Treasury bonds (which can be viewed as a type of borrowing), that money earns interest and stays within the program.

Another myth? That Social Security is “going broke.” That’s misleading. Yes, the trust fund reserves are expected to run out, but payroll taxes will continue to fund a significant portion of benefits—unless Congress steps in to shore things up.

What We Can Do Now

I truly believe that understanding how Social Security works is the first step in securing your retirement. Whether you’re just starting your career or approaching retirement age, knowing what to expect can help you plan smarter and make informed decisions.

If you haven’t already, I recommend creating an account at ssa.gov to get a personalized estimate of your benefits. It’s one of the best tools available for retirement planning.

And finally, let’s keep this conversation going. What do you think? Should payroll taxes be increased? Should the income cap be lifted? I’d love to hear your thoughts in the comments.

All writings are for educational and entertainment purposes only and does not provide investment or financial advice of any kind.

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