CHAPTER 2

Social Security Tax Rates -
How Does Social Security Work




What are the social security tax rates and how have they changed over the years? What are the social security tax rates and how have they changed over the years? We will start by discussing how money comes into the social security system.


How Money Goes In

In today’s environment, a parent presents a social security card application to begin the process of obtaining a social security number for their child. Of course, the SSN becomes the identifying criteria for a number of agencies and companies, including establishing a 529 College Savings account.

Once the number is obtained, then that person must submit that number to his/her employer for payroll setup purposes.

A person begins paying into the social security system on date of their first paycheck by any employer in the United States. If one starts his/her own business, they are required to pay to the United States Treasury the amount that is required for self-employed persons.


Before we discuss the social security tax rates that are charged on your income, let’s first identify the components of the tax. It consists of three components and one summation element:

1. OASI = Old-Age and Survivor Insurance
2. DI = Disability Insurance
3. HI = Hospital Insurance
4. OASDI = Old-Age, Survivor, and Disability Insurance


The rate that must be paid to the U S Treasury has changed significantly over the years. Believe it or not, the rate for Old-Age and Survivor Insurance (OASI) started out at one percent (1.0%) in 1937.

Note that both the employer AND the employee had to pay that rate, so 2.0% was paid to the government. None of the other components applied at that time. Disability Insurance came into play in 1957 at a rate of 0.25% for each employer and employee. Thus, the total rate paid in was 2.25% each by employer and employee, made up of 2.0% OASI and 0.25% DI. HI was added in 1966 at 0.35% each. The total OASDI and HI is 7.65% for 2009 to be paid each by employer and employee, according to the latest table published on the social security website. The social security tax rates mentioned here are applied on all income one earns up to $106,800 for the year for 2009.

However, if one is self-employed, then one must pay both sides of the rate for a total of 15.3% for OASDI and HI. Just think, it all starts with your social security card application.



How Money Goes Out

The amazing thing about social security is the concept of the process itself. When it began, more people were paying into social security than were receiving benefits. That has changed significantly. Here is a short table of the Social Security Covered Workers to Beneficiaries over the years:

YearCovered Workers (thousands)Beneficiaries (thousands)Ratio
194035,390222159.4
195048,2802,93016.3
196072,53014,2625.1
197093,09026,1683.7
1980113,65535,1183.2
1990133,67239,4703.4
2000155,29545,1663.4
2006161,85248,8633.3

Since the beginning of the program through 2007, the social security program has expended $10.6 trillion based on the social security tax rates shown above. During that same time period the program has received $13.0 trillion. Based on the fact that more baby boomers are starting to retire, more money will be required for those additional payments, which will put additional strain on the program.

The program has not always taken enough money each year to pay the current year’s benefits. There has been 11 years when this has occurred, the last period was from 1975 - 1981. During those years, Trust Fund bonds made up the difference.




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