In light of recent nationwide attention to reform of federal funding for the Social Security programs, we feel that it might be helpful to review some of the fact regarding how such programs, including the SSA’s disability benefits programs, are funded.
When you are employed, Social Security taxes, otherwise known as FICA taxes, are automatically deducted from your earnings. If you are an employee, the tax is 6.2% of your earnings, and your employer pays an additional 6.2%. Taxes which are paid into this fund, known as the Social Security Trust Fund, are what fund the Social Security and disability programs. Designed to be a pay-as-you-go system since its inception, the fund has until recent years brought in more money through FICA taxes than it has paid out in benefits to retirees and disabled citizens, leaving a surplus.
There has generally never actually been any "surplus" funds in the Social Security Trust Fund, however, as the federal government has historically borrowed excess capital and guaranteed it in the form of bonds, due to be paid back when the SSA has need of the funds for beneficiaries.
The problem created by this borrowing from the Trust Fund is the acceleration of the National Debt and the debatable ability of the government to immediately pay back the funds it has borrowed from its citizens. Roughly $2.6 trillion of the $14.3 trillion National Debt is in the form of government obligations to the Social Security Trust Fund.
The aging of the large Baby Boomer generation has meant an increase in the payouts from the Social Security fund, while subsequent smaller generation groups are contributing fewer FICA taxes into the system. It has been projected that in the next decade, the funds will be depleted and the government will be unable to pay Social Security benefits to citizens who have paid in all their lives without borrowing money or restructuring the Social Security tax. Others are sure that the projected bankruptcy is exaggerated or completely unfounded.
Regardless of whether or not major reforms will completely fix the Social Security system in its current form, it is important to keep in mind that the effect of the Social Security on the National Debt is really the simple result of the federal government having to fulfill its obligation to pay back money borrowed from beneficiaries. The Social Security programs themselves, including benefits paid out to retirees and disabled citizens, are funded by money paid in by beneficiaries through dedicated taxes, and therefore do not create inherently create an obligation that contributes to the national debt.
Those who are currently receiving Social Security Retirement or Social Security Disability Insurance (SSDI) benefits shouldn’t worry that their incomes will be cut off any time in the coming months or even years, and as the budget debate continues to rage in preparation for next year’s presidential election, it is important that people keep in mind the actual role of Social Security in overall government spending.