The Return on Your Social Security Taxes

Here's an interesting piece from Money Watch that discusses the return on your Social Security taxes that addresses the issue of whether or not contributors (on average) get the money they put into Social Security and Medicare (through taxes) back in benefits. Here's their summary:

The question remains, though: Is it worth it? Will the benefits you’d receive under current law compensate you for the career’s worth of taxes you’ll have paid into the system? The latest answer, generated by a new Urban Institute Social Security study, is: yes. (Surprised?) As far as it’s possible to project, Social Security and Medicare give you a positive return on your tax “investment” even after inflation.

And here are some specifics:

How’s it shake out? If you retired last year as an average wage-earning man, for example, you could expect a lifetime benefit worth $417,000 in today’s dollars on $345,000 in taxes. If you were a woman with the same work history, you could expect to collect $464,000 on the same taxes.

A couple things to note:

1. Their last example shows a couple earning around $85k -- what they put in and what they get out. These people are close to the breakeven point. Thus, though they don't show it, I'm assuming that the more you make, the worse the deal gets (that you pay more in taxes than you take out in benefits.) Wow, that's inspiring.

2. Since when was "getting your money back" a criteria for a "good deal"? (Not that they are saying that, but they imply that it's a good deal.) Wouldn't getting a "good return" (8% to 10%) on a few hundred thousand you "invest" (pay in taxes in this case) over a working lifetime be a better measure of a "good deal"?

So it's a decent (at least breakeven) deal for most people. Personally, I'll just be happy to get SOMETHING back. Hopefully the age to get Social Security won't be 95 by the time I retire. ;-)

Comments

[Jonathan]

I can't believe the original article concludes that, "Yes, it's a good deal. You get your seized money back plus about 20%!" As if the fact that you paid that money out over the 40 years prior to receiving a dime back and got paid back over the 20-30 years following that point are irrelevant. "20% more than you put in!" (yes, I realize that I'm not accounting for inflation, but regardless, the numbers in the original article reflect a pretty terrible deal).

Now, I recognize that a large percentage of Americans would probably squander the money they didn't have to pay if SS were disbanded—but I'd argue that in large part this is because they've been trained for the past 70 years that they don't need to plan for their future because SS will take care of them. Personally, if my wife and I had an additional $10k per year to invest, you can bet we'd be doing a heck of a lot better than SS "promises" for that $10k when we retire—and sooner. Not to mention we'd be able to use our own discretion on the best way for that money to benefit us.

[Old Limey]

Yesterday's headline was that SS runs out of money in 2037. I would be 103 by then so I am personally not concerned, however it's another indication of the total failure of "Government" to handle their money the way we all have to manage ours.
If you believe that there's a lot of money in the SS Lockbox then you also believe in the Tooth Fairy. The sad truth is that the two party system has not worked well for a long time, there is so much divisiveness that only the easiest decisions get made and the tough ones just get put on the back burner.
Most politicians are only concerned with keeping their lucrative job at the next election, whereas intelligent, ordinary folk plan their lives years into the future because they cannot print money. Just another reason why personally, I don't give money to charities - I never know whether or not at some time in the future I may need it for my own family.

[jim]

All the figures are adjusted for inflation to 2010 dollars.

Plus the 'lifetime tax' figure includes 2% interest. So the amount of $345,000 in taxes is NOT the actual amount of tax paid but its adjusted for inflation + 2% interest over the years.

The actual report says: "The “lifetime value of taxes” is based upon the value of accumulated taxes, as if those taxes were put into an account that earned a 2 percent real rate of return (that is, 2 percent plus inflation)."

From 1951 to 2009 the absolute maximum amount that anyone put into SS is $124,901.

And that would be a worst case scenario for someone who made maximum income and maximum contributions for 50 years... Virtually nobody paid in that much. Typical amount is closer to half that.

[Jonathan]

Jim, don't forget the employer's half of the contribution, money which would otherwise go to the employee - double your figure of $125,000 (which I verfied is accurate, good work!). 4% rate of return is pretty pathetic...

[Strick]

Madoff's early investers saw much better returns than these.

And I assume this includes the employer half as well, or its much worse than I thought.

[AZJoe]

My experience is that reputable insurance sales people discuss including the value of Social Security in any calculations of how much insurance to buy. It is interesting to me that Money Watch did not factor in any valuation for the long term disability coverage should a worker become disabled or the value of potential survivor income. Both would otherwise have to be covered with disability and life insurance policies. I don't know that it makes it a greatly better deal, but every Social Security participant automatically has that coverage, which is worth something.

[Southsidetoby]

Social Security is better thought of as insurance, rather than as an investment. It is designed to spread a known risk (loss of income resulting from age and/or disability) among a large number of people, many of whom will never face the misfortune of such a loss -- and many who will. Before Social Security was enacted, poverty was rampant among the elderly, even in an era where it was more common for the elderly to live in the same household with children and grandchildren. Social Security has allowed older people to remain relatively independent and to contribute to and benefit the economy, something that benefits employers and employees throughout the economy.

The comments to this post are understandable, I suppose, but to a limited extent. After working for several years, individuals who have enjoyed relatively good health and security can look back on decades of earnings and persuade themselves that they would have been better off if they had never had to contribute to Social Security. It's fine that we indulge ourselves in that way, but before calling for the elimination of Social Security we should ask ourselves a couple of questions: Suppose I had been rendered quadriplegic in my 30s and was unable to earn income? Suppose my spouse and I had to care for and support grandparents, great grandparents, aunts and uncles who lacked the resources to support themselves? Suppose the millions of would be Social Security recipients hadn't had the money to patronize my company or business?

For all its flaws, Social Security has an important role to play in our post-industrial economy, where people change jobs or start and close businesses numerous times over a lifetime of work. We participate in it through our earnings -- our work and individual effort-- and in exchange we can ensure that people have the most basic means of subsistence in their later years or if they become disabled. It makes our country stronger and more competitive and it is entirely consistent with the philosophical underpinnings of our country.

[JimL]

The overall analysis is flawed as the current system and funding cannot be sustained. In reality, the eligibility age needs to be raised, taxes increased, or a combination of both. Medicare, likewise, has huge financial issues. If you made the adjustments to the programs, the "returns" would look much worse.

[MBTN]

Southsideboy beat me to the punch with his excellent point that Social Security isn't an investment. It is INSURANCE. Some people pay into Social Security and get NOTHING. Others pay a little bit into Social Security and get a lifetime disability benefit. That's the way insurance works. Nobody tries to calculate their ROI on their auto insurance. I've never had a claim on my auto insurance policy, so I know that I am WAY in the hole. However, I know it's there in case I get hit with a $500,000 lawsuit which would wipe out my entire net worth.

That being said, we all know that Social Security needs to have some "tweaks" in order to keep it solvent. However, I don't blame our politicians for not fixing it. I blame all of us Americans (myself included). There is a reason why it is called the "third rail" of politics. Any politician who suggests fixing it gets electrocuted at the ballot box. We Americans can't stand for anybody who tries to do something sensible like raise the retirement age or reduce the benefit. Think of the uproar there was over the fact that the Social Security cost of living adjustment was 0% this past year. Can you imagine the revolt that would happen if somebody suggested raising the retirement age a year or two? AARP would be all over that politician, calling for his or her head on a platter.

If we want to fix the problem with Social Security, we as voters need to stop being so short sighted and reward politicians who want to reform it, rather than vote them out.

[Dan]

Well at least the first person to get a SS check made out well. Paid in $24.75 and got almost $23k back (see link). It's been downhill since then.

[Georgia]

And too many people have forgotten - SS was to be a HELP, not a COMPLETE LIVING allowance. We began to depend on it for everything and complain when it didn't. Whose fault is that? Ours.

I agree that the ballot box is screwed when we punish our leaders for even trying to fix things. As if we could do it so much better.

[Jacob @ My Personal Finance Journey]

I'd be interested to see what the ROI of social security taxes will be in a few years with all of Baby Boomers heading in to retirement. I guess we'll just have to stay tuned.