What’s the “Return” on Your Social Security Taxes?

[rockyj]

The return on my social security is that my mother has continued to be able to live modestly, but independently, well into her 80s, long past the death of my father, and that I don't have to step over other indigent elders on my way to dinner and a movie. That's sufficient return for me.

"...we have tried to frame a law which will give some measure of protection to the average citizen and to his family against the loss of a job and against poverty-ridden old age."

FDR from: Presidential Statement Signing the Social Security Act, August 14, 1935, Social Security Online - HISTORY

 

[DeborahB]

SS used to be a much smaller % of wages (as you probably all know). I never even thought about it, it was so tiny. But when it ballooned to current rates, it was such a significant amount that I expect to get some money back now that I'm retired.

I probably don't absolutely need it - I wouldn't go hungry etc. - but I paid in and I want the reward, not the booby prize.

 

[GregLee]

I thought the "return" on your Social Security contributions was ZERO, since you're paying for the Social Security being received by current beneficiaries.

You can think of each dollar you pay in SS tax as flying directly into the pocket of a SS retiree, but it makes as much sense to imagine that your SS tax buys government securities which will later fund your own pension, and that current SS pensioners get dollars from government securities that they bought in the past with their own SS tax contributions. Making due allowance for certain welfare aspects of SS, of course. The principle is that dollars are indistinguishable, and it makes no real difference whether you view SS pension dollars as coming from current SS tax or securities (possibly hypothetical) bought in the past with SS tax dollars.

 

[ziggy29]

You can think of each dollar you pay in SS tax as flying directly into the pocket of a SS retiree, but it makes as much sense to imagine that your SS tax buys government securities which will later fund your own pension, and that current SS pensioners get dollars from government securities that they bought in the past with their own SS tax contributions.

True in some ways, I think, with the obvious stipulation that each successive generation can expect less from each "invested" dollar than the previous generation.

 

[MasterBlaster]

You can think of each dollar you pay in SS tax as flying directly into the pocket of a SS retiree, but it makes as much sense to imagine that your SS tax buys government securities which will later fund your own pension, and that current SS pensioners get dollars from government securities that they bought in the past with their own SS tax contributions. Making due allowance for certain welfare aspects of SS, of course. The principle is that dollars are indistinguishable, and it makes no real difference whether you view SS pension dollars as coming from current SS tax or securities (possibly hypothetical) bought in the past with SS tax dollars.

You can think that way, but the so called trust fund really has already been spent. There is no ready cash reserve waiting to fund your payment.

That's where all this talk of unfunded liabilities comes in. We promised you a SS pension but there isn't enough to pay everyone what we promised.

 

[Arnie]

I have never believed the fundamental question is whether you could potentially do better on your own than with SS...

True, since for most people this is not an optional "investment". But it is interesting to consider in the context of privatizing or otherwise revamping - not that this would ever happen.

 

[frank]

did any of you consider the income tax on ss benefits when calculating the return on investment or is this something that does figure in? just wondering.

 

[Independent]

Here's a fact that stopped me the first time I saw it:

In a paygo public retirement scheme with a fixed tax rate, there is enough money to provide each cohort of workers an apparent "return" equal to the growth rate in total covered wages.

For example, if the number of workers grows by 1% per year, productivity driven wage gains are 2%, and inflation driven wage gains are 3%, the "return" on the paygo system should be 6% nominal or 3% real. Of course some workers will do better and some worse.

 

[ziggy29]

For example, if the number of workers grows by 1% per year, productivity driven wage gains are 2%, and inflation driven wage gains are 3%, the "return" on the paygo system should be 6% nominal or 3% real. Of course some workers will do better and some worse.

What is this thing called "wage gains" of which you speak?

 

[Independent]

What is this thing called "wage gains" of which you speak?

Something that used to happen in the US economy

It's interesting (maybe frustrating is a better word) that mean wages have been going up even though median wages are pretty flat. The SS trustees' report says that for the 40 years ending in 2008, the average gain in real covered wages was 0.8%. That's not great, but it beats 0%. 2010 Trustees Report: Section V.B, Economic assumptions & methods

Comparing SS to private investing, one issue is whether it's possible for corporate profits to grow faster than wages over a long period of time.

You've had a couple posts that indicate you believe each generation will do worse than the prior. Is that because you believe the labor force growth will continue to shrink, real wage growth will continue to shrink, or ?

 

[Jay_Gatsby]

You can think that way, but the so called trust fund really has already been spent. There is no ready cash reserve waiting to fund your payment.

That's where all this talk of unfunded liabilities comes in. We promised you a SS pension but there isn't enough to pay everyone what we promised.

You forgot "and we took your money in exchange for that promise...."

If the government doesn't honor its promise, it has, for all intents and purposes transformed an entitlement into a tax. Funny how that works....

 

[packrat44]

Well, Ms. Ida Mae Fuller got the first social security check on 31 Jan 1940 for $22.54. Social Security Online History Pages

Ms. Fuller lived to be 100 years old and received $22,888.92 on total contributions of $24.75. Now that's a return.

With an ROI like that, she should have "invested" $10,000.