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 $110,100 (in 2012), while the self-employed pay 12.4 percent.
In 2011, $564 billion (70 percent) of total OASI and DI income came from payroll taxes. The remainder was provided by interest earnings ($114 billion or 14 percent) and revenue from taxation of OASDI benefits ($24 billion or 3 percent), and $103 billion in reimbursements from the General Fund of the Treasury - almost exclusively resulting from the 2011 payroll tax legislation.
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: 2012 OASDI Trustees Report. | |||
*The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010, reduced the Social Security payroll tax rate by 2% on the portion of the tax paid by the worker in 2011. This reduction was extended through the end of February 2012 by the Temporary Payroll Tax Cut Continuation Act of 2011 and under the Middle Class Tax Relief and Job Creation Act of 2012, the reduction was extended through December 2012. Transfers will be made from the General Fund of the Treasury to the Trust Funds and earnings will be credited to the records of workers.
