For better or worse, Social Security is our country's most important social program. Founded in the mid-1930s and paying out benefits to retired workers since Jan. 1, 1940, it's a program that, today, is leaned on to keep more than 15 million seniors a year out of poverty.
It's also an incredibly expensive program to operate. Last year marked the first time in Social Security's history that aggregate expenditures -- benefits paid plus Railroad Retirement exchange transfers and administrative expenses -- topped $1 trillion. Ensuring that the proverbial gerbil remains on its wheel means collecting a lot of money each and every year.
The payroll tax does Social Security's heavy lifting
Since 1937, payroll taxes on earned income have been the primary source of funding for Social Security. Last year, $885 billion of the just over $1 trillion in income collected by the program was derived from the 12.4% tax on earned income, which includes salary and wages but not investment income. Keep in mind that this tax comes with a cap of $132,900 in earned income in 2019, albeit this upper limit tends to increase in step with the National Average Wage Index each year, as long as there's a positive cost-of-living adjustment.
Social Security's payroll tax is a big reason why the program can never go bankrupt. As long as Congress doesn't change how the program collects money, the fact that Americans continue to work, earn wages, and pay tax on those wages ensures that some amount of income will always be flowing into the Social Security program.
It's worth noting that Social Security also gets a pretty decent amount of revenue each year from the interest it earns on its excess cash. By law, the Social Security Administration is required to invest the program's net-cash surpluses in special-issue bonds, which vary in yield and maturity date. With close to $2.9 trillion currently in reserves at an average yield of more than 2.8%, it's no surprise that Social Security is racking up more than $80 billion in interest income a year on Uncle Sam's tab. Last year, the interest income on the program's asset reserves resulted in the collection of $83.1 billion.
It's also an incredibly expensive program to operate. Last year marked the first time in Social Security's history that aggregate expenditures -- benefits paid plus Railroad Retirement exchange transfers and administrative expenses -- topped $1 trillion. Ensuring that the proverbial gerbil remains on its wheel means collecting a lot of money each and every year.
The payroll tax does Social Security's heavy lifting
Since 1937, payroll taxes on earned income have been the primary source of funding for Social Security. Last year, $885 billion of the just over $1 trillion in income collected by the program was derived from the 12.4% tax on earned income, which includes salary and wages but not investment income. Keep in mind that this tax comes with a cap of $132,900 in earned income in 2019, albeit this upper limit tends to increase in step with the National Average Wage Index each year, as long as there's a positive cost-of-living adjustment.
Social Security's payroll tax is a big reason why the program can never go bankrupt. As long as Congress doesn't change how the program collects money, the fact that Americans continue to work, earn wages, and pay tax on those wages ensures that some amount of income will always be flowing into the Social Security program.
It's worth noting that Social Security also gets a pretty decent amount of revenue each year from the interest it earns on its excess cash. By law, the Social Security Administration is required to invest the program's net-cash surpluses in special-issue bonds, which vary in yield and maturity date. With close to $2.9 trillion currently in reserves at an average yield of more than 2.8%, it's no surprise that Social Security is racking up more than $80 billion in interest income a year on Uncle Sam's tab. Last year, the interest income on the program's asset reserves resulted in the collection of $83.1 billion.
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