Like HowStuffWorks on Facebook!

How Social Security Tax Works

        Money | Taxes

The Social Security system helps those who have retired and those who have suffered serious injury or illness, as well as their families.
The Social Security system helps those who have retired and those who have suffered serious injury or illness, as well as their families.
Comstock/Getty Images

The U.S. Social Security system acts as a giant safety net, providing financial assistance to people who have reached retirement age and younger folks who have suffered a serious injury or illness. It also helps out the family members of those who experience death or disability. Medicare, a health insurance program that covers most Americans over age 65 as well as some disabled people, is also part of the safety net. All told, Social Security represents a very large helping hand -- paying out some $40 billion in benefits every year [source: socialsecurity.gov].

Of course, there's no such thing as a free lunch. All that money has to come from somewhere. If you're a working American, it comes directly from your paycheck. Technically, it's dispersed from the Social Security Trust Fund, but the fund is filled by taking a percentage out of everyone's paycheck. Since the program's inception in the 1930s, more workers have paid into the fund than retired people drawing money from it. However, increased life expectancy and the Baby Boomer generation have been shifting the ratio. In fact, the government predicts that the Social Security Trust Fund could start running out of money in 30 to 40 years. That means that someday, the percentage taken out of your paycheck could increase to extend the life of the fund.

While Social Security taxes seem pretty straightforward -- the percentage taken is the same for almost everyone up to a certain income level -- a closer look at the system raises a lot of questions. Who determines the percentage taken from each paycheck? How is the cost-of-living increase determined? Why are Social Security taxes sometimes considered regressive? How much do I have to pay into the system to qualify for Social Security benefits? How long should I wait before I retire? We'll tackle these taxing questions and more.

 


More to Explore