Social Security benefits are fading - Part1

[imoldernu]

A married couple retiring last year after both spouses earned average lifetime wages paid about $598,000 in Social Security taxes during their careers. They can expect to collect about $556,000 in benefits, if the man lives to 82 and the woman lives to 85, according to a 2011 study by the Urban Institute, a Washington think tank.

Social Security benefits are fading - Brockton, MA - The Enterprise

Part one of a four part series.

Not a good deal, unless something happens (illness, accident, financial loss) on the way to a happy retirement.

 

[Midpack]

Along the same lines as this, posted here several times in the past (original source http://www.urban.org/UploadedPDF/social-security-medicare-benefits-over-lifetime.pdf). On this table you can see SS alone, Medicare alone and of course both combined. FWIW

 

[jdmorton]

What I ‘Don’t Get’ About These Types of Articles...

...What is the basis of their assumptions and logic? Our local paper published the same article this morning, as it is an Associated Press article. Our paper also published a sidebar table titled “Benefit vs. tax”, and gave 4 examples of the lifetime social security benefits and lifetime social security taxes for someone turning 65 in 1960, 1980, 2010, and 2030 and living to their projected old age. However, I believe they meant to say for a couple, rather than an individual.

Anyway, for someone retiring in 2010, the table listed lifetime social security benefits of $555,000 and lifetime social security taxes paid of $588,000. My first thought was “man, the amount of taxes paid does not sound right”. So, I went to the social security website and found a couple of documents that provided the historical maximum wage amount that has been taxed for social security (the OASI percent) and then the corresponding historical percentages for social security (OASI), disability insurance, and hospital insurance (Medicare). In 2012, the sum of all of those parts deducted from eligible wages totals 5.65%, which includes the 2% reduction Congress enacted for 2011 and 2012. I plugged the historical data into an Excel spreadsheet and determined the following:

Assume this “typical” individual who retired at age 65 at the end of 2010 started working at age 18 (at the beginning of 1963) and made exactly the maximum wage amount that is taxed for social security each year for the 47 years worked. Here are the totals I calculated:
1. Total gross wages: $2,180,600
2. Total social security tax paid (OASI): $113,368.95
3. Total disability insurance tax paid: $17,055.97
4. Total hospital insurance/Medicare tax paid: $30,041.40
5. Total social security tax paid (sum of 2, 3, and 4 above): $160,466.32

So, for a married couple working exactly the same timeframe and making exactly the same amount, their lifetime gross wages are in excess of $4.3 million and their total social security tax paid is about $321,000.

I don’t get it…Would the average US worker or family consider the total amount of lifetime wages for this couple “average”? And where does the additional $267,000 in social security taxes paid come from ($588,000 - $321,000), considering I used the yearly maximum wages subject to the largest component of the social security tax (OASI)?

Yes, I realize that the current hospital insurance/Medicare tax of 1.45% does not have a wage cap and has not had a cap for awhile now, but I thought the purpose of the article would be to show a “typical” individual/couple. I also realize that if this couple was not self-employed, then their respective employers pay half of their social security taxes; not half of what I calculated, but the same amount as what I calculated since individuals working for someone else pay half of their total social security tax obligation. Self-employed individuals would pay twice what was calculated above. (Hopefully that is not as confusing as it might first read )

Of course, my assumptions, logic, and calculations could be off

 

[GrayHare]

Despite the numerous articles about this, AFAIK none state if the dollar values are adjusted for inflation. Seems like the values must be, otherwise contributing $500k of past dollars into SS and getting $500k of inflated dollars back decades later is a huge loss.

 

[Midpack]

jdmorton: Without checking your calcs, what seems to be missing compared to the table is the employers contribution, though you're aware of that based on your later paragraph. The employers contribution should be included as it's part of your wages/cost of your employment. YMMV

 

[MasterBlaster]

JDMorton:

The other thing is that all the dollars need be adjusted to a common inflation baseline. All of the taxes paid are greater than they seem if you inflate them to current dollars.

I suspect that the math is correct in the article.

 

[samclem]

The employers contribution should be included as it's part of your wages/cost of your employment. YMMV

+1. That's the way to show what was paid. It doesn't matter that the "employer paid" it, it was factored into the employer's costs and would have gone to the worker if not for SS.

 

[rescueme]

(snip)...would have gone to the worker if not for SS.

Sure it would have! ....

 

[veremchuka]

I saw this too in today's paper. The numbers for someone retiring today at 65 seem way out of whack. I checked my SS statement and the total I paid retiring at age 57, and I never had salary that reached the maximum SS in any year where I stopped paying, was $77,415 my employer paid $77,491 I paid for Medicare $18,007 my employer paid $18,007 so that totals $190,920. That's a far cry from these numbers even doubling it if I had a spouse earning the same. Now I did retire just before my 57th birthday but I don't see how working 8 more years would increase this that much. I question the numbers in the article.

 

[photoguy]

I saw this too in today's paper. The numbers for someone retiring today at 65 seem way out of whack.

I agree -- the 598k lifetime social security taxes paid for the "average" couple seems out of whack. Assuming

- 40 year work life
- 6.2% rate paid by employee and employer
- equal income for both spouses

The only way I get $598k is if they are making about $62k each or $124k total. That's nowhere near the "average" household income.

the 598k total works out to

299k per person (including employee and employer taxes)
149k per person (employee only)
149k / 40years = $3.752k / year
3.752k / 0.062% rate = $62.5k income

 

[Independent]

jdmorton is correct, the numbers as quoted in the AP article don't make sense.

Fortunately, we can go to the Urban Institute website and see the original study
http://www.urban.org/UploadedPDF/social-security-medicare-benefits-over-lifetime.pdf

It 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). The “lifetime value of benefits”
represents the amount needed in an account (also earning a 2 percent real interest rate) to pay for
those benefits

So, the particular couple in this example is getting a return that's just a little less than (inflation + 2%).

I think if the average person bought a house 30 years ago, and sold it today for a price appreciation of nearly inflation + 2%, that person would definitely feel like he made money on the house.
It's pretty misleading (or ignorant) for a reporter to say that the homeowner is getting back less than he paid.

 

[samclem]

I saw this too in today's paper. The numbers for someone retiring today at 65 seem way out of whack.

I agree -- the 598k lifetime social security taxes paid for the "average" couple seems out of whack. Assuming

You guys need to adjust for inflation, that's the only way to do the computation properly (that is, to correctly show the value of the premiums paid). If you use one of those online inflation calculators to put your annual contributions (and those of your employer) into 2011 dollars it will probably make much more sense. That $100 SS tax paid in 1985 = $205 in 2011 dollars. The Urban Institute study that apparently underlies much of this AP report does all the math in 2011 dollars, and it also attributes a growth rate of 2% to the paid premiums.

These tables provide estimates of the lifetime value of Social Security and Medicare benefits and taxes for typical workers in different generations at various earning levels. The tables are updated to reflect assumptions and projections in the 2011 OASDI and Medicare Trustees reports. 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). The “lifetime value of benefits” represents the amount needed in an account (also earning a 2 percent real interest rate) to pay for those benefits. See The Urban Institute | Q&A with C. Eugene Steuerle: Estimating Social Security and Medicare Taxes and Benefits over a Lifetime for more information on assumptions and methodology. . . .
All estimates are shown in 2011 dollars. As mortality assumptions for the model are provided in five-year intervals, estimates of benefits for the 2011 cohort are taken by assuming linear growth in benefits and taxes between the 2010 cohort and the 2015 cohort.

Edited to add: I went back and read closer, noticed that neither of you guys used historical SS "taxes paid" info, so the inflation thing isn't the problem. It's probably the 2% interest that the Urban Institute added in. Thanks, Independent!

 

[rescueme]

Edited to add: I went back and read closer, noticed that neither of you guys used historical SS "taxes paid" info, so the inflation thing isn't the problem. It's probably the 2% interest that the Urban Institute added in. Thanks, Independent!

And therein lies a problem.

While I understand and accept that the contributions should be adjusted for inflation in order to equalize the stats, adding in anything in for "interest" should not be considered for SS. Most benefits a paid out with current contributions with a slight portion going to reserves and subject to that "magic 2%".

And in todays world (depending on source) reserves are possibly being reduced at an increasing rate.

SS is not an investment but rather nothing more than a tax redistribution scheme, IMHO.

 

[samclem]

SS is not an investment but rather nothing more than a tax redistribution scheme, IMHO.

I'd say it is a wealth redistribution system that works across two gradients:

From young --> old
From those who earned more money over their working lives --> Those who earned less over their working lives

That's not a judgement on the merits of the program, it's just the way the money flows.

 

[Mulligan]

Feeling a rare sense of modest intellectual curiosity I checked my SS. My career was outside the realm of SS, but I contributed about 15 years worth of part-time jobs in high school, college, and summers during the late 70's through the early 90's. If I was 62 today, I would draw $105 a month with WEP reduction. So just using straight dollar in and out without adjusting for inflation, it will take 90 months to get back what was paid in under my name. Adjusting for inflation, I probably would be dead before I broke even. But don't pass the collection hat around for me yet, as I am taking a job this year that pays into SS, and it will cause my monthly payment to skyrocket all the way up to about $125!

 

[Cut-Throat]

What everyone needs to understand is that these articles are politically motivated. This one takes a different tac than the usual.

The usual line is Social Security is running out of money (Despite the program has a $2.3 Trillion Dollar surplus) and we won't be able to pay you.....Please let us "Fix" the program....Which translates to "Eliminate it" Eventually. The Federal Government does not have any money at all to pay the Defense Department, but it continues to operate every year....No one talks about the Defense Dept. Running out of money.

This article was written to convince people that it is a bad deal for people to contribute to it...That you could do much better with your money...Please someone, show me where I can get a 2% real return on my money.

Social security should be looked at like "Old Age Insurance"....Just like you have Fire Insurance....No one laments not having a Fire in their home and getting screwed by paying into Insurance.

It's the price of a society.

Today the Chinese are contemplating a Social Pension program to help their economy. The average Chinese person is saving almost 60% of their income...They are squirreling it away for retirement. It is hurting their domestic economy..No one is spending any money...They're all saving for retirement.

So, just recognize this article for what it is.....Politically Motivated.

 

[MasterBlaster]

Social security should be looked at like "Old Age Insurance"....

To some people that means welfare. And you know how well that gets funded.

 

[sheehs1]

+1. That's the way to show what was paid. It doesn't matter that the "employer paid" it, it was factored into the employer's costs and would have gone to the worker if not for SS.

Not necessarily Sam Clem. Businesses consider this part of the cost of an employee. Not part of their wages. That said...if businesses did not have to pay it...it would free up some money for wages....maybe...but I doubt it.

 

[ziggy29]

Not necessarily Sam Clem. Businesses consider this part of the cost of an employee. Not part of their wages. That said...if businesses did not have to pay it...it would free up some money for wages....maybe...but I doubt it.

In a booming economy like the one I remembered in Silicon Valley in the late 1990s, employers would almost certainly have to give most of that as wages to remain competitive. In this economy? No chance -- they'd pocket the entire amount as pure profit because they don't *have* to pay it to be competitive or attract applicants.

 

[Cut-Throat]

I'd say it is a wealth redistribution system that works across two gradients:
From those who earned more money over their working lives --> Those who earned less over their working lives

That's not a judgement on the merits of the program, it's just the way the money flows.

Not even Close!

Everyone pays in the same percent and draws a proportional amount based on the amount that they paid in. The more you pay in the more you draw out.

In fact it probably works in reverse to what you said. Poor people on average die sooner than rich people and actually draw less proportionally of the money that they paid in.

 

[noone]

Not even Close!

Everyone pays in the same percent and draws a proportional amount based on the amount that they paid in. The more you pay in the more you draw out.

In fact it probably works in reverse to what you said. Poor people on average die sooner than rich people and actually draw less proportionally of the money that they paid in.

Noone knows you've been ranting about SS here and on other forums for years. I thought you decided to go live in a van down by the river and give us a rest...

 

[MichaelB]

Let's settle down folks.

 

[samclem]

In fact it probably works in reverse to what you said. Poor people on average die sooner than rich people and actually draw less proportionally of the money that they paid in.

Nope. Poor people do (on balance) die sooner. But those who earned less during their working lives still "get back" a much larger percentage of what they paid in. It's not an opinion, it's hard, objective data from SS, and it's precisely the way the system is designed to work. If you make more money you get progressively less in benefits for additional amounts you pay in (the formula has a couple of "knee points", it's not smoothly progressive). SS is a much better "deal" for the poor than for those earning more.

From a study performed by the US Treasury:
The very first line of the Treasury study (for anyone questioning that SS is designed to redistribute wealth):

A basic redistributional goal of the U. S. Social Security program is to award higher rates of return on the contributions of low-wage than high-wage workers.

And to your point, from page 4 (emphasis added):

We find income has a significantly negative effect on the probability of death for men and women, a result consistent with recent mortality research. Next, we incorporate the income-adjusted mortality rates into a detailed simulation of lifetime benefits and real rates of
return for a subset of the 1895-1922 cohorts. Here we find income-adjusted mortality rates do affect the distribution of Social Security benefits across income classes, but not nearly enough to alter the basic progressivity of the benefit structure.

And I'm sure you don't dispute that the system is a transfer from the young to the old--that's the way the system was designed from day one. The taxes paid by today's (younger) workers go to today's (older) reirees.

 

[gauss]

In a booming economy like the one I remembered in Silicon Valley in the late 1990s, employers would almost certainly have to give most of that as wages to remain competitive. In this economy? No chance -- they'd pocket the entire amount as pure profit because they don't *have* to pay it to be competitive or attract applicants.

+1

And that's why I think these articles are deceptive when they don't explicitly mention that the employers contributions are being included.

IMHO Headlines suggesting that people are getting less out of SS than what they put into it will invoke very different responses in the masses than a headline that would suggest that YOU are getting $2 out for every $1 that YOU put in.

 

[jdmorton]

Thanks for Some of the Replies

Haven't been able to get back here since I posted earlier this week. My initial reaction to the published article is still the same - I now believe that one of the individuals who helped author the article did not understand the Urban Institutes study that is quoted. I really think that individual believes someone (or w someones - that is not clear) who makes $43,000/year (the salary used in the study) actually paid over 1/2 million dollars into Social Security over their working years.

I also think that the author(s) went looking for some sort of "economic" study to help "justify" the premise of their story - that SS is a good deal for older folks (the 79 year old woman), might or might not be a good deal for those close to retirement (the 52 year old man), and not a good deal for those who are a long way from retirement (the 22 year old young lady).

The scary part is, this is the first of 4 segments on social security this "team" is writing - can't wait to see what the other three have to offer