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What’s the “Return” on Your Social Security Taxes?
Old 01-11-2011, 08:30 PM   #1
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What’s the “Return” on Your Social Security Taxes?

What’s the “Return” on Your Social Security Taxes? - CBS MoneyWatch.com

Excerpt:
"As far as it’s possible to project, Social Security and Medicare give you a positive return on your tax “investment” even after inflation."

Not sure I would have ever believed it - although I guess I never thought of including Medicare - nor do I think I have the wherewithal to prove or disprove it. Thoughts?
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Old 01-11-2011, 08:43 PM   #2
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Well sure, throwing in Medicare changes things considerably and makes a positive long term return more likely. Looking at Social Security by itself though I find it hard to believe, especially if you aren't the average wage earner they show in their examples. Higher wage earners pay in considerably more and help subsidize low wage earners so the return won't be nearly as good.
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Old 01-11-2011, 09:21 PM   #3
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Looking at my Social Security statement it shows that if I retire at 66 it would take about 86 months to break even including the employers contribution. Considering that the IRS says that at 66 one has a life expectancy of 240 or so months thats a pretty good deal.
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Old 01-11-2011, 10:19 PM   #4
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It's a bit of a simplification to compare the return on Social Security contributions with the return on retirement accounts as FICA pays for insurance premiums protecting workers and covered family members against loss of income in retirement, loss of income from disability, as well as survivor benefits in the event of the wage earners death.

However, FYI I also contribute to the UK's system and as I work in the US I make voluntary contributions at a reduced rate. Last year it was $224 It's the same rate that self employed people in the UK pay so they can keep their costs down and it provides a basic state pension at age 66 after 30 years. I've been paying this for the past 25 years (it was less in previous years). By the time I stop paying I'll have contributed $6k and if I'd invested my contributions over the 30 years at 5% I'd have $12k. Projecting forward to age 66 that $12k would have grown to about $20k. The UK basic pension isn't great, but with cost of living adjustments it should be $1500/month when I'm 66. That's a lot more that $20k could ever generate.
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Old 01-12-2011, 07:38 AM   #5
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I have never believed the fundamental question is whether you could potentially do better on your own than with SS. The question is do we need and/or want a social safety net. I come down on the yes side since I believe many many more people would be in much worse shape without it. Then the question becomes how best to structure the system and pay for it. Or, in the current situation, how best to restructure it to keep it viable.
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Old 01-12-2011, 10:45 AM   #6
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Yet another shining example of what a horrible deal SS is. lets just call it welfare and be done with it.

And these numbers are before the inevitable cuts and extra taxes that will be forthcoming.

The deal just keeps getting worse.
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Old 01-12-2011, 10:58 AM   #7
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The only problem is that they are separate programs... lumping them together is a cheap way to try and make one look better...


Now, I am not saying we should get rid of SS or medicare.... but don't try to justify a program by saying it is good because the benefits of another are so great that it makes up for whatever bad there is....
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Old 01-12-2011, 11:00 AM   #8
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I have never believed the fundamental question is whether you could potentially do better on your own than with SS. The question is do we need and/or want a social safety net. I come down on the yes side since I believe many many more people would be in much worse shape without it. Then the question becomes how best to structure the system and pay for it. Or, in the current situation, how best to restructure it to keep it viable.
Yep-- I'd rather call it "Social Security" instead of "retirement insurance".

I've only put $45,585 into FICA over the years. If that pre-tax money had been compounding at 5.7% tax-deferred since my first paycheck then today it'd be worth $123K. But it'd be interesting to run it through the actual S&P500 or TSM performance since my first contribution, and of course it'd have to be adjusted for inflation as well.
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Old 01-12-2011, 11:29 AM   #9
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The return on my social security taxes? Only time will tell since I don't know when I'll die. For all I know, my return could be -100%.

So far, my wife and I have paid $60,359 in SS taxes over the course of our careers. Given the benefits quoted to us, the US SS system seems quite generous (for the time being at least). My parents' European SS system seems a lot more stingy when it comes to the benefits/taxation ratio.
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Old 01-12-2011, 11:50 AM   #10
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I've only put $45,585 into FICA over the years. If that pre-tax money had been compounding at 5.7% tax-deferred since my first paycheck then today it'd be worth $123K.
This is where people get SS wrong. It's a progressive system and the more you earn the less (proportionally) you get back. It's there to insure all workers against loss of income in various circumstances and its an important part of a balanced financial portfolio, just like proper house or medical insurance

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Yet another shining example of what a horrible deal SS is. lets just call it welfare and be done with it.
and the idea of calling it welfare is a slur against every hard working American.
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Old 01-12-2011, 12:01 PM   #11
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Simple back of the envelope calculation for just SS and including both my/employer's "contributions", it will take me 66.74 months (5.5 years) to break even, once I file.

That means I have to live another 12.5 years (I'm 63). Regardles of that, my delaying filing for SS till age 70 is really going to benefit my DW. Of course, I won't go lacking for SS income, since I'll be filing a spousal claim for 50% of her FRA SS in another three years, which will provide me "fun money" for four years, till I claim my own benefit.

For those who only consider "their" contribution, divide my number in half which means I'll break even in under three years...
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Old 01-12-2011, 12:08 PM   #12
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This is where people get SS wrong. It's a progressive system and the more you earn the less (proportionally) you get back. It's there to insure all workers against loss of income in various circumstances and its an important part of a balanced financial portfolio, just like proper house or medical insurance

That's the talking points.

It certainly wasn't sold this way as the wealth shifting program that it has become.

And yes it really has become more of a welfare program than an insurance program. Your little dig aside.
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Old 01-12-2011, 12:09 PM   #13
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Not sure I would have ever believed it - although I guess I never thought of including Medicare - nor do I think I have the wherewithal to prove or disprove it. Thoughts?
Yes, why stop at those who turn 65 in 2030 (my age, currently 45)? Is it because they don't feel confident about the data after that point, or because it will no longer support the author's thesis?

If you do a quick calculation of (benefits received / taxes paid), you will see a very consistent pattern: as you get younger, the "return on investment" (if you want to call it that) gets steadily worse.

For example, look at the first table, using a single man earning $43,100 in 2010 dollars)

Born in 1895 (65 in 1960): $125,000/$17,600 = 710% (610% ROI)
Born in 1915 (65 in 1980): $257,000/$102,800 = 250% (150% ROI)
Born in 1945 (65 in 2010): $417,000/$345,000 = 121% (21% ROI)
Born in 1965 (65 in 2030): $569,000/$476,000 = 119% (19% ROI)

Hope I'm not supposed to get excited about an "investment" that returns a total of a real 19% over my lifetime of contributions (and yes, I recognize there are other benefits than just the old age pension component and that one also has to consider life expectancies or the chances of reaching 65 in each era). But if someone is going to write about it as an "investment," then it's fair to evaluate it as such in rebuttal.

But the real problem is that the deal gets worse for each new generation, and somehow each new generation has to be "sold" on preserving something that gives each successive generation a worse deal than their parents' generation.
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Old 01-12-2011, 12:12 PM   #14
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Simple back of the envelope calculation for just SS and including both my/employer's "contributions", it will take me 66.74 months (5.5 years) to break even, once I file.

That means I have to live another 12.5 years (I'm 63).
This calculation misses the mark.

You are forgetting the big big impact of inflation. Those dollars you paid decades ago were worth much much more than the dollars you will receive.

The bigger point is the lost opportunity of those dollars to snowball in your own account.

Also don't forget to double the payments as foregone wages paid on your behalf by your employer.
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Old 01-12-2011, 12:14 PM   #15
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This calculation misses the mark.

You are forgetting the big big impact of inflation. Those dollars you paid decades ago were worth much much more than the dollars you will receive.
I believe all these numbers were adjusted for inflation and listed in 2010 dollars. Having said that, I'd also repeat: I hope I'm not supposed to be excited about getting a total ROI of a real 19% for several decades of contributions.
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Old 01-12-2011, 12:31 PM   #16
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Also don't forget to double the payments as foregone wages paid on your behalf by your employer.
I hear this comment all the time, but I don't believe my former employers along the way would be willing to give me the money they contributed as a pay raise.

They contributed the same reason why I contributed (it's the law) and the only reason they even put that money aside - for my future benefit. What company gives raises unless they are forced to, by some reason (e.g. law, employee retention or acquisition)? None that I know of. Every public company I worked for only gave "extra" $$$ not to me, but did so for the benefit of the stockholders.

As far as inflation? Those "contributions" were adjusted for inflation to calculate my expected monthly benefit, so that is indeed considered in the projected monthly SS.

BTW, those mentioning that they could have done better by "investing" on their own, forget (or don't realize) that SS is not an investment program at all. It is simply income/benefit shifting from one generation to another.

I contributed so that my parents/grandparents could get an SS check till the day they died (they are all gone). Since they are gone and I'm retired (not yet receiving SS), there is a wash. While my son is disabled, he still works in a sheltered workshop, and pays FICA. In a way, he will be contributing to my SS (along with his, since he's on SSD; he's paying his own way).
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Old 01-12-2011, 12:33 PM   #17
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I hear this comment all the time, but I don't believe my former employers along the way would be willing to give me the money they contributed as a pay raise.
Are we talking about *this* economy or in, say, Silicon Valley around 1998?

In a cutthroat, highly competitive job market where skilled talent is at a premium, yes, I think they *would* have added to their cash compensation. They would have had to do so in order to make competitive offers.

In this economy? Not a chance.
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Old 01-12-2011, 12:39 PM   #18
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Yep-- I'd rather call it "Social Security" instead of "retirement insurance".

I've only put $45,585 into FICA over the years. If that pre-tax money had been compounding at 5.7% tax-deferred since my first paycheck then today it'd be worth $123K. But it'd be interesting to run it through the actual S&P500 or TSM performance since my first contribution, and of course it'd have to be adjusted for inflation as well.

Did you and FD include the company match Most people forget that the amount paid for them is twice what they pay... (or more if you change jobs and exceed the max contribution)...
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Old 01-12-2011, 12:50 PM   #19
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Did you and FD include the company match Most people forget that the amount paid for them is twice what they pay... (or more if you change jobs and exceed the max contribution)...
Looking at the numbers, I think this is accounted for or else the math is really bad.

Look at the first table again. It says that in 2010 dollars, a single male earning $43,100 who will be 65 in 2030 will pay $392,000 in SS taxes and $84,000 in Medicare taxes.

Now consider the Medicare piece for now. The Medicare tax is 1.45% for both employee and employer. But a person earning $43,100 a year would owe (43100 * 0.0145) = $625 per year in Medicare taxes. Dividing $84K into $625 gives more than 100 years of paying *only* 1.45% into Medicare. Double that rate and it at least starts to look closer.

So I guess they are probably assuming steady w*rk between young adulthood and age 65, and factoring in real wage increases (probably too optimistically, IMO) *and* the employer contributions -- otherwise this math can't work.
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Old 01-12-2011, 12:50 PM   #20
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Are we talking about *this* economy or in, say, Silicon Valley around 1998?

In a cutthroat, highly competitive job market where skilled talent is at a premium, yes, I think they *would* have added to their cash compensation. They would have had to do so in order to make competitive offers.

In this economy? Not a chance.
That's why I said "employee retention or acquisition" to address those exceptions, which you commented on. For the great majority of employees, they would not just get additional $$$ if they showed up for work, even in a hot economy.
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