How is Social Security Financed?
Social Security is financed through a dedicated payroll tax. Employers and employees each pay 6.2 percent* of wages up to the taxable maximum of $106,800 (in 2011), while the self-employed pay 12.4 percent.
In 2010, $637 billion (82 percent) of total OASI and DI income came from payroll taxes. The remainder was provided by interest earnings ($117 billion or 15 percent) and revenue from taxation of OASDI benefits ($24 billion or 3 percent), and $2 billion in reimbursements from the General Fund of the Treasury.
The payroll tax rates are set by law and for OASI and DI apply to earnings up to a certain amount. This amount, called the earnings base, rises as average wages increase.
| Year | OASI | DI | OASDI |
|---|---|---|---|
| 2000 and later | 5.30 | 0.90 | 6.20 |
| SOURCE: 2010 OASDI Trustees Report. | |||
*Section 601 of the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 would, for wages and salaries paid in calendar year 2011 and self-employment in calendar year 2011, reduce the OASDI payroll tax by 2 percentage points, applied to the portion of the tax paid by the worker. Transfers would be made from the General Fund of the Treasury to the Trust Funds and earnings would be credited to the records of workers.
Section 101 of the Temporary Payroll Tax Cut Continuation Act of 2011 extends this reduction of the tax rate through the end of February 2012. (The reduced tax rate for earnings in 2012 applies only to the first $18,350 of a worker’s total wages and self-employment income. The limit of $18,350 is two-twelfths of the $110,100 taxable earnings limit for 2012.) Unless additional legislation is approved, the tax rate will then revert to the unreduced rate.
