Bob Brinker's Marketimer

  Wednesday December 12, 2018

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Learn even more about this topic with the Encyclopedia of Personal Finance™

Social Security and Medicare taxes are withheld from your paycheck, matched by your employer, and sent to the IRS. You and your employer each pay 7.65 percent of your gross salary in taxes, up to a maximum taxable salary of $90,000 in 2005 ($94,200 in 2006). This limit usually increases each year. Your earnings are reported to Social Security under your Social Security number. If you are self-employed, you pay all of your Social Security taxes on your self-employment income.

If you earn more than the yearly Social Security limit, you still have to pay Medicare taxes on your salary. This rate is 1.45 percent, or 2.9 percent for self-employed workers.

The Social Security taxes you pay go into trust funds in the U.S. Treasury. These trust funds are called the Old Age and Survivors Insurance (OASI) and the Disability Insurance (DI) trust funds. The OASI pays for retirement and survivors' benefits. The DI pays disability benefits.

There are also two Medicare trust funds: Hospital Insurance (HI) and Supplementary Medical Insurance (SMI). Most of your Social Security taxes (5.35 of the total 7.65 percent) go to OASI.

Money from payroll taxes is collected and deposited into these trust funds. Any money not used to pay benefits is invested in special U.S. Government bonds to build future funds. The trust funds are managed by a board of trustees and are funded by the partial reserve method. The goal of partial reserve is for the funds to take in more money than they pay out in order to prepare for increasing number of retirees.

A bond is essentially a loan with interest. The bond issuer (in this case, the government) agrees to pay interest on the loan as well as pay back the full amount of the bond at a preset future date. The government uses the bonds Social Security invests in to pay for a wide array of programs and deficits. The Social Security trust funds earn interest on these bonds.

As Baby Boomers retire, U.S. Treasury bonds on Social Security funds will have to be cashed in. Will there be enough money left to pay Social Security?


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