More Than Half of Americans Don’t Understand How Social Security Is Funded (Do You?)

Social Security is a cornerstone of many Americans' income in their golden years, yet a surprising number don't understand how it's funded. The Cato Institute's August 2025 Social Security Survey revealed that more than half (55%) of Americans don't know where the money comes from.

In reality, understanding how the system is financed matters if you want to set yourself up for retirement. Let's break down how Social Security works, and what it means for your financial future.

Payroll taxes are the main funding source

Social Security is primarily funded through payroll taxes under the Federal Insurance Contributions Act (FICA). Employees and employers each contribute 6.2% of wages, for a combined total of 12.4% up to an annual earnings limit, while self-employed individuals pay the full 12.4% themselves. In 2025, the taxable wage ceiling is set at $176,100. These contributions go toward current retirees' benefits, not into personal accounts.

There is no personal Social Security account

According to the 2025 Cato Institute study, almost a quarter (23%) of respondents mistakenly believed their Social Security contributions are saved in a personal account for them. Another 32% of respondents said they didn't know how it's funded at all.

In truth, Social Security is a pay-as-you-go system. Today's contributions pay for today's retirees and tomorrow's workforce funds future beneficiaries, which only 45% of respondents understood.

Trust funds provide a financial buffer

Surplus payroll taxes are placed into the Social Security trust funds, namely the Old-Age and Survivors Insurance (OASI) and Disability Insurance (DI) funds, which invest in special U.S. Treasury bonds. When tax revenues fall short of benefit obligations, these reserves are used.

But projections indicate the combined trust funds could be depleted by as soon as 2033, at which point approximately 70 million beneficiaries could see their benefits reduced by more than 20%. Ultimately, Congressional action is needed to prevent a major reduction in benefits.

Demographic shifts are increasing the strain

Social Security was built during a time when far more workers supported each retiree. There were 5.1 workers per beneficiary in 1960, but today, that ratio has shrunk to just 2.8 workers per beneficiary.

With fewer people paying into the system but more drawing benefits due to factors such as lower birth rates, immigration, and an aging population, the program's funding is under growing pressure. These demographic trends are creating a funding gap that policymakers must address to maintain the program's future viability.

Strategies to improve funding

Several reform options could strengthen Social Security's longevity. Some options under consideration include raising or eliminating the payroll tax cap, incrementally increasing the payroll tax rate, or raising the full retirement age.

These steps may help close the projected funding gap and secure Social Security benefits for future generations. At the same time, preparing for a future with less reliance on Social Security alone is becoming increasingly prudent.

Why knowing this matters for your retirement planning

Since your Social Security isn't held in a personal account, you're relying on the broader system's finances, where demographics, legislation, and economic policy all play certain roles. Understanding this reality should encourage you to diversify your retirement savings, perhaps through IRAs, 401(k)s, or other investments. Being informed helps you build a retirement plan that works, even if Social Security changes.

Bottom line

More than half of Americans don't grasp how Social Security is funded, even though the program is a vital safety net for retirees and a fundamental part of a secure retirement plan. It relies largely on payroll taxes, with trust funds acting as temporary reserves, and future support hinges on systemic stability.

While the system faces challenges, a better understanding today can empower smarter decisions tomorrow. Manage your expectations and be sure to supplement your Social Security with additional savings to strengthen your financial footing.