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HRCCU Blog

Social Security, Explained

Posted by Katie Koke on Feb 17, 2020 11:00:00 AM

When you get paid, there are 2 programs that you pay into as mandated by the federal government: Medicaid and Social Security (also known as FICA). There’s no doubt that you’ve noticed this pulled from your paycheck every pay period, and of the two programs Social Security is by a significant margin the more expensive, with the current withholding rate sitting at 6.2% of your gross income--compared to the 1.45% withheld for Medicare. 

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While people have a general sense of what that 6.2% is going to, there is sometimes a knowledge gap when it comes to having a deeper knowledge of why you’re paying into this program. If you fall into that category, we’ve put together an explainer based on some of the most frequently asked questions related to the program. With that said, let’s dig in.

 

How Social Security Works 

At its core, Social Security is a retirement and disability insurance program, with workers paying into the 2 trust funds managed by the United States Treasury. These trust funds are:  

Old-Age and Survivors Insurance (OASI)

The larger of the 2 trust funds, OASI was created specifically to disperse benefits for retirees, or any remaining funds owed to the spouse or children of an individual who has passed away.

Disability Insurance Trust Fund (DI Trust Fund)

This fund exists to provide financial assistance to individuals with physical and mental disabilities that are not able to work because of these disabilities. It is the smaller of the two trusts, because it is applicable to fewer people and requires less money to function properly.

With both of these trusts, they operate by investing the money collected from tax-payers into government securities (eg; treasury bonds, treasury notes, etc.), which allows the money to slowly grow over a period of time through natural APY growth, which in theory allows the programs to sustain themselves in perpetuity.

Why Social Security Exists

The OASI component of Social Security was originally passed in 1935 through the Social Security Act (SSA), with the overarching philosophy behind it being that when people became too old to work, they should have the ability to retire with an adequate amount of money to survive, even if they hadn’t personally saved a lot of money in their working days. In 1956, the SSA was amended to include an insurance plan to financially aid people with disabilities, in the form of the DI Trust Fund. In essence, social security was created to act as what has been commonly referred to as a “social safety net”.

Can Social Security Survive? 

When the Social Security program was first created, it was not done so with modern expectations in mind, which has led many to wonder if it can survive for much longer. With leaps forward in medical innovations leading to longer lifespans, and a fairly rapid population boom occurring in the years since the second world war, the number of people working- and paying into the social security fund- has been bypassed by the amount of people sitting at retirement age and collecting social security. In 2019, it was projected that OASI funds would run out by 2034, with the DI Trust Fund running out by 2052. 

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It’s difficult to predict on a simple “yes or no” basis if Social Security will survive past the current projected expiration dates. However, the possibility does make it all the more important to be prepared for your retirement on your own terms and HRCCU is to help you do just that. Through both IRA savings and a number of different high-yield savings accounts, you can start putting money for the future into places with guaranteed protections and guaranteed growth!