Who Pays for Social Security?

Workers and employers pay for Social Security. Workers pay 6.2 percent of their earnings up to $106,800 a year in 2010. (The cap on taxable earnings usually rises each year with average wages.) Employers pay a matching amount for a combined contribution of 12.4 percent of earnings. Self-employed persons pay both the employee and employer share for a total 12.4 percent. (Half of this contribution, the employer share, is a deductible business expense for income tax purposes.) Also, higher-income Social Security beneficiaries pay federal income taxes on their benefit income, and these taxes help pay for Social Security.

In December 2010, as part of the “tax cut deal,” Congress passed a temporary two percent reduction in the employee share of Social Security contributions, called the “payroll tax holiday.” The reduction lasts one year, and the $120 billion in lost revenue to the Social Security program will be made up from the government’s general fund.

In 2010 the average worker made $43,084 a year, according to the Social Security Administration. This worker paid $2,671 a year, or 6.2 percent of salary, and the employer paid an identical amount, with their combined taxes being $5,342. The maximum tax for workers is set at $6,622 in 2010, and in that same year, 5 percent of all workers will earn more than the $106,800 tax cap. Earnings above the cap now account for 15 percent of the aggregate pay of all workers who pay into Social Security.

An additional tax on workers' earnings pays for Medicare hospital insurance. This is a 1.45 percent levy, paid by workers and employers each on all wages, for a total tax of 2.9 percent. Self-employed persons pay 2.9 percent.

Examples: Jon Smith makes $50,000 in 2010, and Jane Doe makes $120,000 for the year. Jon pays $3,100 for Social Security (6.2 percent of $50,000) and $725 for Medicare (1.45 percent of $50,000) for a total of $3,825 for the year. His employer pays an identical amount. Jane pays $6,622 for Social Security (6.2 percent of the 2010 maximum wage base of $106,800) and $1,740 for Medicare (1.45 percent of $120,000 salary), for a total of $8,362 for 2010. Her employer pays the same.

In 2011, due to the temporary payroll tax reduction, Jon would contribute $2,100 to the Social Security program (4.2 percent of his salary), and Jane would contribute $4,486. Their employers’ contributions would not change.

For more information, see:

• Social Security Benefits, Finances, and Policy Options: A Primer
• Fixing Social Security: Adequate Finances, Adequate Benefits
• Social Security Finances: Findings of the 2012 Trustees Report, Social Security Brief No. 39
• Options to Balance Social Security Funds Over the Next 75 Years, Social Security Brief No.18

Read what some NASI members think:*

• Jon Forman: "The right tax to pay for Social Security" (3/30/05)
• Ed Welch: "A Solution for the Crisis" (3/11/05)
  

* The views of NASI members are their own and not an official position of the National Academy of Social Insurance or its funders.