Another analysis: Why Early Social Security Provides the Greatest Spousal Benefit

[Time2]

The increase is 8% per year after your FRA but is NOT compounded... so if your PIA at your FRA of 67 is $100, then your age 70 benefit would be $124... an added 3 years of increase at 8%.

You can't really compare the 8% increase in benefit to a market rate of return. They are two different animals.

The uncompounded 8% for 3 years is the same as 7.4% compounded for 3 years. Still not a bad rate for a guaranteed increase.

 

[pb4uski]

The uncompounded 8% for 3 years is the same as 7.4% compounded for 3 years. Still not a bad rate for a guaranteed increase.

I agree but just wanted to make clear that the 8% isn't compounded. The larger point which is a common misconception is that the 8% annual increase in your benefit is an 8% "return"... it isn't and your "return" from delaying receiving benefits really depends on how long you collect and will be negative if you die early.

Thems the chances that you take.

 

[ncbill]

No. Its an entitlement program, not a welfare program.

It is true that benefits are slighly skewed to lower earners as a result of the bend points in the benefits program, it is a subtle welfare component.

Unlike traditional welfare programs, Social Security is not based on a needs test. It is an entitlement program, meaning those who contribute through payroll taxes are entitled to receive benefits upon meeting eligibility requirements (age, disability, etc.).

The majority of Social Security funding comes from dedicated payroll taxes, not directly from general tax revenue. This differentiates it from programs funded solely by the government.

Benefits are calculated based on lifetime earnings, reflecting a connection between contributions and benefits. This differs from welfare programs that provide assistance based on need regardless of past contributions.

Benefits are heavily skewed towards lower earners via bend points.

The whole bend point scheme makes it easier to retire early because once past the second bend point very little additional earnings are credited to the monthly benefit.

The making up to 85% taxable was a change that favored lower wage earners at the expense of higher wage earners.

From a historical perspective, Congress has always intervened to protect those eligible for lower benefits at the expense of those eligible for higher benefits.

So there will be no automatic, across the board cuts...Congress will step in first.

 

[pb4uski]

....The making up to 85% taxable was a change that favored lower wage earners at the expense of higher wage earners. ... Congress has always intervened to protect those eligible for lower benefits at the expense of those eligible for higher benefits. ...

Incorrect. Higher income taxpayers are paying about what they should on average at 85% so it isn't correct to describe it as "at the expense of higher wage earners". The SSA actuaries estimated that on average about 17% of retirement benefits were a return of contributions and that 83% was growth... so in a perfect world everyone would have paid taxes on 83% of their benefits.

...Estimates by the Office of the Actuary of the Social Security Administration indicate that workers now entering covered employment in aggregate will make payroll tax payments totaling no more than 17 percent of the benefits that they can expect to receive. The self-employed will pay no more than 26 percent on average. Therefore, if social security benefits were accorded the same tax treatment as private pensions, only 17 percent of the benefit would be exempt from tax when received, and 83 percent would be taxable. ...

In order to get the change across the finish line politically, Congress had to create the current scheme where a lower amount of social security would be taxable for lower income people so that's what they did. So in short, lower income recipients are given a tax break from what they really should pay... but NOT to the detriment of higher income recipients as you suggest.

...The changes introduced by the 1993 amendments were designed to make the treatment of Social Security benefits more closely approximate private pensions--albeit, only for higher-income beneficiaries. To this end, the taxable percentage was set at 85% for these higher-income beneficiaries. New thresholds were added, but only to differentiate those subject to the higher percentage from those still subject to the 50% figure.

In explaining the rationale for these changes, the House Budget Report stated:

"The committee desires to more closely conform the income tax treatment of Social Security benefits and private pension benefits by increasing the maximum amount of Social Security benefits included in gross income for certain higher-income beneficiaries. Reducing the exclusion for Social Security benefits for these beneficiaries will enhance both the horizontal and vertical equity of the individual income tax system by treating all income in a more similar manner." ...

 

[Time2]

Benefits are heavily skewed towards lower earners via bend points.

I'm a winner on SS*. Between myself and my employer we paid a total of $131,000. In 11 months at 70 yrs old, I will collect $38,000 a year.


* providing I live long enough.

 

[karen1972]

with "survivors benefits" -- which is when one of them passes, the surviving spouse is eligible for 100% of the spouse-that-passed SS at the time they passed, as long as the claiming/surviving spouse is at least their FRA.

My mother was 10 years younger than my dad who passed at 83, so she took over his check which left her in a very good situation. We were afraid she wouldn't get the full amount due to lots of misinformation, but she did.

I honestly think the survivor benefit is one of the most misunderstood, misquoted things I've seen around SS and it doesn't appear to be factored into the charts and such from the article.

Though I can't say I followed the logic that well after they mentioned a PIA of $3000 and them being able to save $300k in 8 years but that means they didn't factor in the 30% haircut they would have gotten from taking it at 62 and so I assumed all math after that was flawed.

 

[ncbill]

Incorrect. Higher income taxpayers are paying about what they should on average at 85% so it isn't correct to describe it as "at the expense of higher wage earners". The SSA actuaries estimated that on average about 17% of retirement benefits were a return of contributions and that 83% was growth... so in a perfect world everyone would have paid taxes on 83% of their benefits.

In order to get the change across the finish line politically, Congress had to create the current scheme where a lower amount of social security would be taxable for lower income people so that's what they did. So in short, lower income recipients are given a tax break from what they really should pay... but NOT to the detriment of higher income recipients as you suggest.

Prior to 1983 (really 1984) nobody paid taxes on their SS retirement.

Then the first 50% was taxed, raised to 85% taxable a decade later for those with higher SS, sparing those with lower SS from any taxes on their benefits.

So yes, Congress chose to spare those collecting lower benefits by taxing those receiving higher benefits.

Sure, those extra taxes just go into the general fund but that where all SS taxes go to (and SS benefits come from) on an actual cash basis anyhow.

 

[Gumby]

Prior to 1983 (really 1984) nobody paid taxes on their SS retirement.

Then the first 50% was taxed, raised to 85% taxable a decade later for those with higher SS, sparing those with lower SS from any taxes on their benefits.

So yes, Congress chose to spare those collecting lower benefits by taxing those receiving higher benefits.

Sure, those extra taxes just go into the general fund but that where all SS taxes go to (and SS benefits come from) on an actual cash basis anyhow.

The threshold income levels for taxation of social security are not indexed for inflation and have remained the same since 1993. So, as social security benefits have increased due to COLAs and wage indexing, more and more people pay taxes on social security income every year. Given enough time, everyone may eventually pay taxes on their social security income.

 

[Fermion]

I'm a winner on SS*. Between myself and my employer we paid a total of $131,000. In 11 months at 70 yrs old, I will collect $38,000.


* providing I live long enough.

$131,000 invested in Microsoft in 2015 would be worth $1,400,000 today though, so there is that.

 

[Gumby]

And $131,000 invested in Chesapeake Energy in 2015 would be worth ZERO today, since the company went into bankruptcy and the old shareholders were wiped out. The point being that you cannot just pick a winner and use that for comparison.

 

[Bigdawg]

And $131,000 invested in Chesapeake Energy in 2015 would be worth ZERO today, since the company went into bankruptcy and the old shareholders were wiped out. The point being that you cannot just pick a winner and use that for comparison.

or pick a loser and use that for comparison. For planning purposed I would choose the total market return over that same period.

 

[Gumby]

or pick a loser and use that for comparison. For planning purposed I would choose the total market return over that same period.

That would be a more reasonable approach, although I think the comparison would need also to include some fixed income component for stability and to more closely approximate the risk profile.

 

[bada bing]

Incorrect. Higher income taxpayers are paying about what they should on average at 85% so it isn't correct to describe it as "at the expense of higher wage earners". The SSA actuaries estimated that on average about 17% of retirement benefits were a return of contributions and that 83% was growth... so in a perfect world everyone would have paid taxes on 83% of their benefits.

The math doesn't work like that in a system heavily skewed by bend points. The lower earners should be paying taxes on an even higher percentage than the upper earners, because their benefit is much higher per dollar contributed. Their post tax contributions are a much smaller part of their benefit checks. In a system with bend points, there is no generally applicable "average", your payback percentage is widely variable depending on where you land on the bend points. And it works in the inverse, where the lower your benefit, the greater the percentage that should be taxable. If your litmus test for taxability is just giving credit for the portion of benefits that are return of post tax contributions, then there is only one point on the bend points that lines up with 85%, with some paying too much and almost everyone else paying too little.

There is no "growth" in SS. There is inflation adjustment and that's it. The employer & employee contributions cited on SSA.gov are in nominal dollars. The post tax, employee contribution dollars plus some type of time value return would have been tax free had it been put in a Roth, or at least taxed at LTCG rates if not. The maximum justifiable mathematically "fair" way to assess tax would be 50% of benefits (the portion attributable to employer contributions) as ordinary income. The other 50% minus the nominal employee after tax contributions (all of them, not just best 35) counted as LTCG. That is an apples:apples comparison with other options. No one should be paying ordinary income tax rates on 85% of their SS benefit.

But to get even further into the weeds, the variable percentage of SS subject to tax is then run through another very progressive system - the federal tax brackets. What is the result of one progressive algorithm run against another progressive algorithm ? Progressive^2 ? And the money collected is put back into the trust fund. .

I suspect taxing SS benefits was just another money grab from upper earners to shore up the system in a politically palatable way. That would match with the budget concerns that drove the action in the first place. No one was thinking to make the system "more fair", because the action taken was the opposite of fairness. Anyone that believes the rhetoric in support of any .gov action is the total real story hasn't been paying attention for the last 50 years.

 

[pb4uski]

Prior to 1983 (really 1984) nobody paid taxes on their SS retirement.

Then the first 50% was taxed, raised to 85% taxable a decade later for those with higher SS, sparing those with lower SS from any taxes on their benefits.

So yes, Congress chose to spare those collecting lower benefits by taxing those receiving higher benefits.

Sure, those extra taxes just go into the general fund but that where all SS taxes go to (and SS benefits come from) on an actual cash basis anyhow.

Actually I have a faint recollection that income taxes paid on SS benefits go into the SS fund and not the general fund so they help out the finances of SS.

Your SS statement will tell you how much you paid in SS taxes during your career. As I recall, about 30% related to life insurance and disability benefits and the remaining 70% to retirement benefits. A few years ago I compared that 70% to my expected benefits through the break even point of 82-1/2 and my contributions were about 15% of what I will receive in benefits. YMMV.

 

[pb4uski]

The threshold income levels for taxation of social security are not indexed for inflation and have remained the same since 1993. So, as social security benefits have increased due to COLAs and wage indexing, more and more people pay taxes on social security income every year. Given enough time, everyone may eventually pay taxes on their social security income.

And I think that was by design. It was a way of eventually phasing out the tax benefit provided to lower income recipients that was put in place to get the legislation passed.

 

[pb4uski]

The math doesn't work like that in a system heavily skewed by bend points. The lower earners should be paying taxes on an even higher percentage than the upper earners, because their benefit is much higher per dollar contributed. Their post tax contributions are a much smaller part of their benefit checks. In a system with bend points, there is no generally applicable "average", your payback percentage is widely variable depending on where you land on the bend points. And it works in the inverse, where the lower your benefit, the greater the percentage that should be taxable. If your litmus test for taxability is just giving credit for the portion of benefits that are return of post tax contributions, then there is only one point on the bend points that lines up with 85%, with some paying too much and almost everyone else paying too little.

There is no "growth" in SS. There is inflation adjustment and that's it. The employer & employee contributions cited on SSA.gov are in nominal dollars. The post tax, employee contribution dollars plus some type of time value return would have been tax free had it been put in a Roth, or at least taxed at LTCG rates if not. The maximum justifiable mathematically "fair" way to assess tax would be 50% of benefits (the portion attributable to employer contributions) as ordinary income. The other 50% minus the nominal employee after tax contributions (all of them, not just best 35) counted as LTCG. That is an apples:apples comparison with other options. No one should be paying ordinary income tax rates on 85% of their SS benefit.

But to get even further into the weeds, the variable percentage of SS subject to tax is then run through another very progressive system - the federal tax brackets. What is the result of one progressive algorithm run against another progressive algorithm ? Progressive^2 ? And the money collected is put back into the trust fund. .

I suspect taxing SS benefits was just another money grab from upper earners to shore up the system in a politically palatable way. That would match with the budget concerns that drove the action in the first place. No one was thinking to make the system "more fair", because the action taken was the opposite of fairness. Anyone that believes the rhetoric in support of any .gov action is the total real story hasn't been paying attention for the last 50 years.

Yes, very unfair. If I were you, I would move.

 

[pb4uski]

$131,000 invested in Microsoft in 2015 would be worth $1,400,000 today though, so there is that.

That's a boatload of cherry picking going on. Funny.

 

[pb4uski]

That would be a more reasonable approach, although I think the comparison would need also to include some fixed income component for stability and to more closely approximate the risk profile.

The reality is that if you look at the composition of defined benefit pension plan assets they are mostly fixed income. Prudence requires it when you are dealing with other people's money.

 

[youbet]

Does the SS you would get at 70 make any difference to the amount you would get at 62 if you end up broke and having to go into LTC?

Honest question. If you have $40,000 income from SS at 75 and no other assets, how does that compare with someone who is 75 and has $30,000 in SS and no other assets, if they both end up needing LTC?

edit: I guess what I mean is that if LTC costs X, and you have Y or Z but both are less than X, does it make any difference in the care you will get?

Probably not. In Illinois either scenario would place you in a Medicaid bed.

 

[ncbill]

$131,000 invested in Microsoft in 2015 would be worth $1,400,000 today though, so there is that.

I tell my youngest I wish I had put everything into Hansen Natural back around 2000.

 

[Time2]

$131,000 invested in Microsoft in 2015 would be worth $1,400,000 today though, so there is that.

And $131,000 invested in Chesapeake Energy in 2015 would be worth ZERO today, since the company went into bankruptcy and the old shareholders were wiped out. The point being that you cannot just pick a winner and use that for comparison.

I'm not saying SS is a great investment. I thought for years I could have done much better investing the money I paid in FICA myself. And I would have invested it. However, as we know, too many people would not save it for there retirement or would do a poor job of investing it and have nothing. We as a society, we would pay to house and feed these people in their old age, and it would be the 51% of us that actually pay federal taxes paying for them. I'm glad they were forced to put some money into the bucket.

Also, all the years of paying SS tax, we are covered by a disability policy, our families were covered with survivors benefit if we should die. Thank goodness most of us didn't need it. Over the years I have changed my thinking about SS.

 

[Fermion]

There is a bill up now that would fix SS until 2054 simply by lifting the cap on the tax. (they also would stop taxing benefits).

A bit too much to pass I think.

https://www.yahoo.com/finance/news/social-security-win-win-bill-123006868.html

 

[foxcreek9]

There is a bill up now that would fix SS until 2054 simply by lifting the cap on the tax. (they also would stop taxing benefits).

A bit too much to pass I think.

https://www.yahoo.com/finance/news/social-security-win-win-bill-123006868.html

It would be the largest tax increase in history, so if someone is making $500k, their total SS tax (with employer match) would go from 20,906 to 62,000 per year.

Since they would probably not get an increase in their own SS, this would make SS just another welfare program.

But taking other people's money is always a winner, until you run out of other people's money.

 

[Fermion]

It still seems like it would play better in the polls than cutting Grandma's budget by 22%.

 

[Gumby]

MODERATOR NOTE: The prior two posts are a clear demonstration of why we have a rule here on the board that we do not discuss/argue legislation until it has been reported out of committee and has some chance of passing. The vast majority of proposed legislation never makes it out of committee and dies on the vine. Please do not go further down this path.