FINANCIAL FRESHMAN #053
TL;DR → Social Security provides financial benefit to retirees, disabled persons, and survivors. As soon as you begin working, you and your employer both will contribute 6.2% into a Social Security trust that funds the disbursements to these recipients. The program will certainly change, but not go away, in the future.
Social Security Introduction
As a college student or recent graduate, you probably don’t think about Social Security very much. That’s totally fine, but don’t you want to understand it before you need to understand it? With this post, the main goal is to demystify Social Security, so that you understand where your money is going (or will go) with each and every paycheck. We’ll keep it introductory.
What is Social Security?
Social Security, in one form or another, has been around since inception by FDR in the mid-1930s. To simplify a ton, think about Social Security as today’s workers funding today’s recipients—and one day, workers will do the same for you.
Recipients of Social Security benefits can be broken out into one of three categories.
We’ll spend our time talking about retirees, since that covers that vast majority of situations.
Understanding this simple explanation can dispel one common misconception already. Unlike an IRA or 401(k), Social Security is not a personal account. Your contributions are not stored in an account with your name on it, rather they are dispersed to fund those currently receiving benefits.
How Social Security is Funded
So for Social Security to provide to these recipients, obviously they need a pile of cash. Think of the Social Security Trust Fund as this pile. As of the time of this writing, this fund holds about $2.7T in total wealth. When the Social Security tax is taken out of your paycheck, this trust is where it (or most of it, technically) goes.
Remember when we outlined the process you’d follow to estimate your take-home pay? If you recall, 6.2% of your pre-tax income will be taken out of each paycheck for Social Security taxes. On your physical paystub, this could present itself in a few different ways.
Ideally your pay stub will be easy to read, and you’ll be searching for a line item that actually says “Social Security” like the example above. It could also use the acronyms FICA or OASDI, which stand for “Federal Insurance Contributions Act” or “Old Age, Survivors, and Disability Insurance” respectively.
Something less commonly known is that your employer is responsible for paying an additional 6.2% as well, for a total of 12.4% into this trust. In the event that you are ever self-employed, you would be responsible for paying this entire percentage on your own.
If you think of this trust as a giant checkbook that the government has to balance every month, the mechanics of Social Security start to become clearer. When the program runs at a surplus, then the value of the fund increases over time. According to data published by the Social Security Administration directly, the value of the trust has fallen gradually since 2020. This means they are operating at a deficit, with recipients entitled to more money than the fund is taking in from payroll deductions.
Will Social Security Still Exist When You Retire?
This brings us to a common discussion point involving Social Security and young people—will Social Security still exist when you retire? And, pessimistically, why do young people often believe that the answer is no?
Short answer: Yes, Social Security will certainly exist. But it may look different.
The fear that the program will vanish entirely is more myth than reality. Since the program is funded primarily through payroll taxes, money continues to flow into the system as long as people are working and paying taxes. In the news however, especially during times of political unrest, it’s not uncommon to find fear-mongering reports that the SSA will run out of money in 2034 or 2033 or 2041. Go back in time, and you can just as easily find reports that the program will run out of money in years that are already behind us.
Keep in mind that, even if the Social Security trust is completely depleted, incoming tax revenue will continue to cover the large majority of scheduled benefits.
When we say that the program may look different in the future, we mean that the retirement age may change, the payroll tax rate could go up, or the SSA could modify benefit formulas. The system will need adjustments, but not abandonment.
Final Thoughts
As soon as you start earning a paycheck, you are paying into this system. While retirement may feel ages away, understanding how Social Security works gives you a clearer picture of the financial support you’re banking with each payroll deduction. This knowledge can help you make smarter decisions about your future, from short-term budgeting to long-term retirement planning.
Next week, we’ll walk through how to create a My Social Security account at SSA.gov, check your personal earnings record, and start taking detailed control of your benefits early.
