Why Is Social Security Tax Withheld?
Social Security provides not only old-age/retirement benefits but disability benefits to retired workers, the disabled and their dependents. Taxes, particularly payroll taxes withheld from workers' paychecks, fund the program.
In 2007, Social Security had a total income of $784.9 billion while payments from Social Security equaled $594.5 billion. In 2007, 16 percent of Americans were receiving Social Security benefits.
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History
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On Aug. 14, 1935, President Franklin D. Roosevelt signed into law the Social Security Act passed by Congress. This led to the creation of a Social Security board made up of three people. One was designated chairman but all three members wielded equal power.
In 1946, the board was reorganized into the Social Security Administration, or SSA, with a single commissioner as the head.
In 1956, Congress amended the law to include benefits for the disabled and not just for the aged.
Function
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Social Security taxes as of 2007 were applied at a rate of 6.2 percent of the employee's salary paid by the employer and another 6.2 percent paid by the employee. The self-employed pay 12.4 percent.
Social Security taxes have a wage threshold, and any earned income over that amount is not taxed. In 2008, the wage threshold amount was $102,000.
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Misconceptions
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Many people have the misconception that the money withheld from their checks over the years is applied to them directly later, at their own retirement or should they become disabled. This is not the case, however. The money taxpayers have withheld is used for benefits paid to the retired workers and disabled as it comes in, not held in an account for the individual workers to use in the future.
Workers must pay into Social Security even if it's unlikely they will ever receive benefits themselves.
Benefits
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The Social Security system as of 2008 pays out an average annual benefit to individual retired workers of $12,948; the poverty level is $10,400.
Social Security pays retired couples on average $21,132; the poverty level for couples is $14,000.
The entitlement is not supposed to be the only means of retirement income for people, but this is often the case, according to the Just Facts website.
Considerations
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Many have criticized the system of funding Social Security through withholding from paychecks. Basically, Americans provide the government with a tax-free loan throughout the year.
Proponents state that most people would have a difficult time paying a lump sum at tax time. By withholding taxes from wages, the Internal Revenue Service doesn't have to spend more money tracking down and collecting owed taxes.
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