Taxes & More: Where Does The Money Taken Out of You Paycheck Go?
We all remember that first paycheck. We carefully calculated our hourly rate or the two week portion of our annual salary to estimate the total amount we would receive. However, when we opened that first payroll document, shock sets in. Where did the rest of our money go? And, right then and there we learned our first lesson on the different in gross pay and net pay.
Gross pay is the amount a worker actually earns – before deductions are made. Net pay is the amount a worker actually takes home and is able to spend. Where does the rest of the money end up? A portion of a worker’s gross pay goes to federal income taxes which fund goods and services for the American people. State income tax is also taken out for qualified states to fund services for the residents of that state. The federal government also deducts a portion to fund benefit programs to help support people unable to support themselves. One of these programs is Social Security.
Initial Intent of Social Security
When the United States was in the midst of the Great Depression and unemployment was at an all-time high, President Franklin Roosevelt proposed a government program for Social Security. After vigorous debate by both the House of Representatives and Senate, The Social Security Act was signed into law by President Roosevelt on August 14, 1935. This original program provided income to the needy, the unemployed and dependent children. It also provided income to retired workers beginning at the age of 65. (Workers contributed a portion of their wages to this fund through payroll taxes.) This initial act, however, provided no benefits to workers who became disabled.
Social Security Disability Insurance is Added
The Social Security Administration realized there was still a vulnerable population who was left without any safety net – disabled workers. The Social Security Amendments of 1956 initiated a disability insurance program which provided these people with coverage against economic instability. The initial act only provided for disabled workers from ages 50 to 64 and disabled adult children. In 1960, the act was amended to provide benefits for workers of any age. However, in an effort to not strain the federal government’s budget, workers were required to contribute a portion of their paycheck into a specific fund that would help them if they became too disabled to earn a reasonable income – the Disability Insurance Trust Fund.
Disability Insurance Trust Fund
Every employed person is required to give a percentage of his or her income to the Disability Insurance Trust Fund to fund Social Security Disability Insurance. Currently, the percentage stands at 6.2% per employee. The employer is also required to kick in 6.2% of a worker’s income. This contribution is added to the Disability Insurance Trust Fund, a separate fund in the U.S. Treasury intended to help people who became disabled and cannot earn an appropriate wage. The trust fund provides automatic spending authority to pay monthly benefits to disabled-worker beneficiaries and their spouses and children. While some workers may complain about how much of their gross pay is sent directly to the federal government, the portion dedicated to Social Security Disability provides a protection of income for them and their families – a protection they may find very necessary one day.
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Is Long-Term Disability Insurance Worth it?
“Where Does All Your Money Go,” The USA Today
“Disabled Insurance Trust Fund,” Social Security Administration
“Historical Background And Development Of Social Security,” Social Security Administration