Social Security taxes, or FICA (Federal Insurance Contributions Act) is generally just an item you see on every pay stub. These taxes cover both Social Security and Medicare benefits. We have become almost numb to the number because we can’t do anything about it. If you work, you will pay this tax. You can’t claim deductions to reduce it or generally get a refund at the end of the year. This tax has become a fact of life whether we like it or not. But, where does this money actually go?
85 cents of every Social Security tax dollar you pay goes to pay the monthly benefits to current retirees and their families and to surviving spouses and children of workers who have died. The other 15 cents is used to pay the benefits to people with disabilities and to their families. Excess contributions go into a trust funds that would be used when incoming tax dollars cannot support the benefits being drawn.
From these trust funds, Social Security also pays the costs of managing the Social Security programs. According to some sources, the Social Security Administration is one of the most efficient agencies in the federal government. While the state of Social Security may be in trouble, the costs associated with running the program seems very efficient for a government program. According to the administration, for each Social Security tax dollar you pay, less than one cent goes towards administration.
For the Medicare portion of the tax, every dollar you pay for Medicare pays for some of the costs of hospital and related care of all Medicare beneficiaries, with excess going into a trust fund. Medicare is managed by the Centers for Medicare & Medicaid Services, not Social Security.
So there you have it, your tax dollars at work. Will you ever see a benefit from the money you’ve been putting into these programs? Only time will tell and that is an entirely different discussion for another day. For more information feel free to visit the Social Security website which has a ton of information that you may find interesting.
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Filed Under: Taxes
About the Author: Jeremy Vohwinkle is a Chartered Retirement Planning Counselor® and spent a few years working as a financial planner. Today, he helps people make the most of their money by writing about personal finance here and elsewhere on the web. Jeremy is also Coach at Adaptu and a regular contributor for other publications such as Intuit, and American Express. Be sure to follow Jeremy on Twitter or Google+.