When one dollar is paid into social security, it is split into two parts. The first 85 cents goes to a trust fund that pays monthly bene- fits to retirees and their families, as well as widows, widowers, and children of workers who have died. The remaining 15 cents goes to a trust fund that pays benefits to people with disabilities and their fam- ilies. Money paid into social security also pays for the program’s administration. These fees come from the two trust funds and amount to less than one cent per dollar paid in.1
The worker pays in his or her 7.65 percent every year until that per- son reaches a maximum wage base. This base is increased every year due to inflation. The limit for the year 2002 was $84,900. Therefore, the maximum paid in by a worker whose income was at that maximum level would be $6494.85 ($84,900 0.0765). For a self-employed worker, that maximum amount would be $12989.7 ($84,900 0.153). In 1991, a new second tax was introduced to help offset the rising costs of Medicare. Now, after the social security maximum wage base is passed, the new, higher Medicare wage base starts. Employees are sub- ject to a tax rate of 1.45 percent on all earnings above $84,900, with the self-employed paying a corresponding 2.9 percent.
So, for those individuals who earn more than the threshold of $84,900, it would appear that they aren’t paying the fair share of social security tax. And many people do argue that. However, the program is designed so that there is a link between how much a worker earns during his or her working lifetime and how much that person receives in benefits, and the benefits formula is weighted so that lower-income earning individuals receive a higher percentage of their earnings.
Social Security’s Solvency There is a rampant fear that social security funds will run out even- tually. Because of this, many people don’t even count on these bene- fits as part of the income they will receive when they are retired. Politicians try to calm our fears about social security, but the fact remains that by continuing the trend we are on right now, Social Security benefits will be exhausted by the year 2037.
1Social Security Administration.