A Social Security Primer

Social Security is funded through a payroll tax. Currently, American workers pay 6.2% of their income into the Social Security Trust Fund, which is matched by another 6.2% from their employer. This tax is paid only on the first $90,000 of a worker's income.

Benefits are calculated according to the total accumulation of Social Security income over the workers' career. The formula is designed to ensure that lower-wage workers will get a larger percentage of their preretirement earnings than those with higher earnings. However, the more you earned, the higher your benefit payment will be. Currently, the average benefit payment is about $955 per month.

Benefit payments are made out of current revenues. In other words, the Social Security taxes paid by today's workers are used to fund benefit payments for today's retirees. Revenues have excedeed benefit payments in all but eleven years since Social Security's inception.

By law, the assets of the Social Security Trust Fund are invested in a mixture of short-term and long-term government bonds. Like Savings Bonds, these investments are backed by the full faith and credit of the U.S. Government. The cash from the Social Security Administration to pay for these bonds goes into the General Fund. The bonds pay interest according to a formula established in 1960. In 2002, the Social Security Trust Fund earned 6.4% interest.