How Is Social Security Disability Financed?

As of July, 2017, 8.8 million disabled workers, who aren’t able to work because of a medical condition were collecting benefits from Social Security.

You probably know that your taxes help fund the Social Security program. But what happens to that money after you pay your taxes?

The majority of social security funding comes from a mandatory payroll tax, enacted under the Federal Insurance Contributions Act (FICA), which requires that employees and employers pay 6.2 percent of wages toward Social Security Insurance(SSI).

A maximum taxable income rate is set by FICA each year, depending on employment data for the year. In 2018, the maximum taxable income is $128,400. After that amount is reached, no contribution to Social Security is required.

Self-employed workers, as both employee and employer, pay 12.4 percent, as required in the Self-Employed Contributions Act (SECA). The amount that represents the employer’s share — or half the amount — is tax-deductible.

FICA and SECA taxes are deposited into the Old Age Security Insurance (OASI) and Disability Insurance (DI) Trust Funds, with the accounts managed by the Department of the Treasury.

Social Security taxes must be based on employment records kept by the Social Security Administration (SSA), not the actual amount collected by the Internal Revenue Service (IRS).

Employers don’t have to separate Social Security taxes from federal income taxes when they deposit payments with Federal Reserve banks. Social Security funds are therefore deposited into the trust accounts on an estimated basis; when wage data for the year is available, the amounts are adjusted according to those figures.

SSA collects wage data from W-2 forms, with individual wage information by the calendar year; employee tips and wages, reported on employee tax returns; and aggregate wage data processed by the IRS four times a year, or each calendar quarter.

Tax adjustments are calculated independently by the Treasury Department and the Social Security Administration(SSA). When they reach an agreement, the Treasury transfers the funds to the trust accounts.

Under the Social Security Act, funds in OASI and DI Trust Fund accounts can only be spent on benefits and administrative costs. In 2016, more than 98 percent of the total disbursements from the combined OASI and DI trust funds were for income benefits. In 2017, 88 percent of income from the funds came from these payroll taxes. Nine percent came from the interest earned on the revenue from the payroll tax, while four percent came from the taxation of the benefits.

Oversight for financial operations for the trust funds is provided by a Board of Trustees, which reports annually to Congress on the financial status of the funds.

Income to the Social Security trust funds is required by law to be invested daily in securities that are guaranteed by the federal government — both principle and interest. Securities held by the trust funds are “special issues” of the United States Treasury. These special issues are only available to the trust funds.

Unlike marketable securities, which are subject to market forces and can gain or lose value if they’re sold before maturity, special issues can be redeemed at any time at face value.

The rate of interest on special issues is determined by a formula that was set in law in 1960. In 2017, the average rate of return over all investments from the OASI and DI trust funds for the year was 2.988 percent.

Money to cover benefit payments, or other expenses, comes from the redemption or sale of the special issue securities. Interest is paid when the securities are redeemed; the principle and interest is just enough to cover the expenditure.

Since the first taxes dedicated to social security were collected in 1937, more than $8.7 trillion has been paid into the program and more than $7.4 trillion has been paid out in benefits.