What is Social Security?
Social Security is a federal government program started in 1935 during the Great Depression to help ensure that retired workers and their family members would not be destitute. Before Social Security, workers were responsible for their own retirement savings, or relied on help from relatives, friends, and neighbors. Because of the widespread poverty during the depression, Social Security was created to provide a basic level of income for retirees and their families.
The original Social Security Act provided only retirement benefits for the worker and provided mainly for lower income workers. Later provisions expanded the benefits to all workers and added payments to the worker’s family members, payments to disabled workers and their families, and survivors’ benefits in case of the premature death of the covered worker. However the system is still geared toward lower income workers.
Your Social Security “Tax”
Social Security is a “pay-as-you-go” system. This means you pay into the system while you’re in the workforce, and those funds are used immediately to provide Social Security benefits to current recipients. Later, when you retire, your Social Security benefits are funded from the wages of younger workers. About 96 percent of workers contribute a portion of each paycheck to Social Security, usually 6.2 percent, which their employers match. This contribution is often called the Social Security tax.
If you’re a high-earner, not all of your income is subject to the Social Security deduction. There is a maximum dollar amount set by law that is subject to Social Security withholdings. If your income is higher than this dollar amount, then only your income up to that amount is subject to withholding.
In 2014, the maximum salary that was subject to withholding was $117,000. If a worker earned $120,000 that year, only the first $117,000 was subject to Social Security deduction.
The amount is adjusted periodically for inflation. Click here to see the current maximum dollar amount that is subject to Social Security withholding.
In return for paying Social Security taxes while working, Social Security offers a monetary benefit starting when you reach a certain age. The next page describes how your Social Security benefit is determined.