That's not actually how Social Security works. Its proponents would like you to think of it like a retirement account or 401k, but it is simply a government welfare program.
Social Security is funded by an income tax
The current tax rate for social security is 6.2% for the employer and 6.2% for the employee, or 12.4% total.
Only the social security tax has a wage base limit. The wage base limit is the maximum wage that's subject to the tax for that year. For earnings in 2019, this base is $132,900.
You can pay taxes on Social Security income if your overall income is high as well.
The problem is there's a fiction called the Social Security Trust Fund
The Social Security Trust Funds are the Old-Age and Survivors Insurance (OASI) and the Disability Insurance (DI) Trust Funds. These funds are accounts managed by the Department of the Treasury. They serve two purposes: (1) they provide an accounting mechanism for tracking all income to and disbursements from the trust funds, and (2) they hold the accumulated assets. These accumulated assets provide automatic spending authority to pay benefits. The Social Security Act limits trust fund expenditures to benefits and administrative costs.
For a long time, SS took in way more than it paid out in benefits. That's where the trust fund came from. There's about $3 trillion in this fund
A 2018 annual surplus of $3.1 billion increased the asset reserves of the combined OASDI trust funds, bringing the total reserves to $2.89 trillion at the end of the year.
So SS is fine right? I mean, they say so later on in that page
The Trustees now project that OASDI annual cost will exceed total income beginning in 2020—two years later than projected in last year's report—and continuing throughout the projection period. After the projected trust fund reserve depletion in 2035, continuing income would be sufficient to pay 80 percent of program cost, declining to 75 percent for 2093.
So where is all this money? They tell us it's well invested
The Social Security trust funds hold money not needed in the current year to pay benefits and administrative costs and, by law, invest it in special Treasury bonds that are guaranteed by the U.S. Government. A market rate of interest is paid to the trust funds on the bonds they hold, and when those bonds reach maturity or are needed to pay benefits, the Treasury redeems them.
Oh, Treasury bills. What is a Treasury Bill?
When an investor purchases a T-Bill, the U.S. government is effectively writing an IOU to the investor. T-bills are considered a safe and conservative investment since the U.S. government backs them.
Er, wait. An IOU? Wikipedia should help clear this up
United States Treasury securities are government debt instruments issued by the United States Department of the Treasury to finance government spending as an alternative to taxation.
So the US Government
- Taxes citizens to fund Social Security
- Takes in surplus
- Uses that surplus to buy Treasury Bills
- Uses the Treasury Bill revenue to pay down US debt
- Repays those Treasury Bills using general appropriations
Surely that can't be right. Or maybe it is...
“In a government shutdown, Social Security checks still go out on time,” Obama said. “In an economic shutdown, if we don’t raise the debt ceiling, they don’t go out on time.”
In other words, the government couldn't borrow the money it needed to repay those Treasury Bills. This is the reason the contributor(worker) to retiree ratio is so critical: as time goes on, more people will be pulling from the system than pay into it. As such, all that money will have to be repaid somehow (likely by financing more debt, raising taxes or both).