Modeling Social Security 2033 Insolvency

[pb4uski]

The website that you linked indicates that the refund provision was enacted in 1935 but that taxes were not collected until 1937 and benefits were not paid until 1942 (later revised in 1939 to start paying benefits in 1940). It also indicates that lump sum payroll tax refunds were phased out in the 1939 legislative changes. So it sounds like this refund benefit was phased out in 1939 before benefits started being paid in 1940. So at most, taxes collected in 1937-1939 where the worker died were refunded (and even that isn't totally clear).

So the feature highlighted in post #247 was phased out 2 years later and it is unclear if any benefits were ever paid out under that provision.

The Social Security Act, enacted on August 14, 1935, provided a new federally administered system of social insurance for the aged financed through payroll taxes paid by employees and their employers. ... No benefits were provided for spouses or children, and lump-sum refunds were provided to the estates of workers who died before age 65 or before receiving at least the equivalent in benefits of their taxes plus interest. Collection of payroll taxes began in 1937, and benefit payments were scheduled to begin in 1942.
...
Based on the Advisory Council's recommendations and recognizing the heavy dependence of most families on the male wage earner at that time, the Congress, in 1939, enacted legislation that eliminated lump-sum payroll tax refunds...
...The Committee on Ways and Means of the House of Representatives and the Senate Committee on Finance, in their reports on the 1939 amendments, reasoned that "Under a social-insurance plan the primary purpose is to pay benefits in accordance with the probable needs of the beneficiaries rather than to make payments to the estate of a deceased person regardless of whether or not he leaves dependents."

...
Other recommendations of the 1938 Council that were enacted in 1939 included:

• Provision for benefits to start in 1940 instead of 1942;
• Revision of the earnings test, allowing earnings of $14.99 a month before benefits were withheld; and
• A method of measuring whether an individual had worked long enough in covered employment to get a benefit--based on "quarters of coverage" the measure on which today's methods are based.

Following implementation of the 1939 amendments, the basic Social Security program was in place. It would remain essentially unchanged over the 1940's

 

[TheWizard]

Do you have any citations for this? I've never heard of this and am skeptical of this claim.

According to Perplexity:

I call BS.

I was wondering about that a bit also...

 

[CRLLS]

Frankly, I was surprised myself

 

[CRLLS]

pb4uski, I probably didn't make myself clear. My quoting the SSA website was a response from #245 where TheWizard was talking about how SS "was designed". Many changes were made as you have pointed out. The way it was designed is stated in the article I referenced. Benefits were originally designed to be based on an average of all wages, not just 35. Was designed is a long way from what it is now, but the original intention (V1.0?) was clear in the article.

 

[Koolau]

Regarding the 39 (but not 40 quarters): If one were to find him/her self in such a situation, a 3 month stint at McDs or other min wage j*b wold likely be a good move.

 

[CRLLS]

Regarding the 39 (but not 40 quarters): If one were to find him/her self in such a situation, a 3 month stint at McDs or other min wage j*b wold likely be a good move.

That post made me check SSA website. I learned something new. You don't need 40 quarters of SS covered employment; you need to earn 40 credits. You can earn all 4 annual credits in one quarter. Some of you smarter guys and gals probably knew that already. I didn't.

Since 1978, you can earn up to a maximum of 4 credits per year.

Credits are based on your total wages and self-employment income for the year. You might work all year to earn 4 credits, or you might earn enough for all 4 in less time.

The amount of earnings it takes to earn a credit may change each year. In 2024, you earn 1 Social Security and Medicare credit for every $1,730 in covered earnings each year. You must earn $6,920 to get the maximum 4 credits for the year.

 

[audreyh1]

That post made me check SSA website. I learned something new. You don't need 40 quarters of SS covered employment; you need to earn 40 credits. You can earn all 4 annual credits in one quarter. Some of you smarter guys and gals probably knew that already. I didn't.

No, I did not know that. Thanks!

 

[pb4uski]

+1 I didn't know that either. $6,920 of earnings to earn 4 credits seems like a pretty low bar. Most of us would have achieved that before the end of January.

 

[Gumby]

An important corollary is that you can earn only 4 credits per year, no matter how much you make.

 

[Koolau]

That post made me check SSA website. I learned something new. You don't need 40 quarters of SS covered employment; you need to earn 40 credits. You can earn all 4 annual credits in one quarter. Some of you smarter guys and gals probably knew that already. I didn't.

No, I did not know that. Thanks!

Nope. I did not know that either. Thanks.

 

[almost there]

I never used SS in my ret plan, But here I am and am glad its here. Looking forward to getting my money back.
That being said, I have little concern with the future of SS. Its only 5.2% of our GDP. Money is a shell game in Washington. So many simple ways they could fund it and make it tax free. But so far, they do not seem to have been too interested. So much waste, foreign wars, insane programs, immigration etc. Or if the GDP goes up, its all of a sudden fully funded. If they wanted it to be. No worries over here. But as mentioned, I never planned on it. But maxed it out every year for decades with overtime. I could survive without it. But spend my SS 1st every month. As it was a zero return loan for 40 years. And have no bones about getting it back.

 

[pb4uski]

.... As it was a zero return loan for 40 years. And have no bones about getting it back.

Not a zero return loan at all. Take the amount that you paid in social security taxes from your SS statement and divide it by your PIA and then multiply the result by 72% (72% paid in goes to retirement benefits with the other 28% for survivor and disability benefits). You'll probably be surprised by how few months of benefits it takes to get back what you paid in. Usually only 1-3 years, so the rest that you receive is for the time value of money and that is why up to 85% of SS is taxed... only 15% is a return of your contributions.

 

[almost there]

Side note, it was not taxed for the 1st 50 years, but has been taxed the past 40.
Its OK that we agree to disagree.
If my math was right, 72% is about 8 years worth. Of 1970's, 80's 90's and 2000's dollars.
With no return on investment. Taking it at 62. Will have to double check the numbers.

 

[almost there]

Went back and did the math. More like 6 years at 72%. And the average person collects it for 19 years.
I do have a tough time comparing the value of a dollar in the 80's I paid in for example to the value of the dollar I am getting back today.

 

[CRLLS]

Not a zero return loan at all. Take the amount that you paid in social security taxes from your SS statement and divide it by your PIA and then multiply the result by 72% (72% paid in goes to retirement benefits with the other 28% for survivor and disability benefits). You'll probably be surprised by how few months of benefits it takes to get back what you paid in. Usually only 1-3 years, so the rest that you receive is for the time value of money and that is why up to 85% of SS is taxed... only 15% is a return of your contributions.

The problem as I see it is that you and others try to rationalize the SS tax withheld over the years vs the benefit received and how that benefit may, or may not be taxed, as if it is an IRA or some other form of investment. SS simply doesn't work that way. There is no return of your contributions, your contributions went to pay earlier recipients. No other federal tax method/ benefit can be rationalized either that I can think of.

Seldom does anyone making this argument take into account the tax-deductible employer's contributions to fund the program, or the loss of ~14 years of contributions (exceeding the 35 years counted) into SS that both the employee and the employer pay into SS. The SS is just another form of federal social program with the exception of it has its own method of funding the program and how they determine the benefit payout.

The sooner we stop trying to figure a SS breakeven point of SS taxes vs benefit, the better IMO.

 

[pb4uski]

Side note, it was not taxed for the 1st 50 years, but has been taxed the past 40.
Its OK that we agree to disagree.

You are correct that it was not taxed initially. The focus was on getting the program going and reducing senior poverty and poor people don't pay taxes so taxes on SS wasn't a priority. Later, with more affluence taxes was a more realistic issue and they later changed the law to tax SS similar to contributory pensions and that is where the 85% came from.

 

[pb4uski]

The problem as I see it is that you and others try to rationalize the SS tax withheld over the years vs the benefit received and how that benefit may, or may not be taxed, as if it is an IRA or some other form of investment. SS simply doesn't work that way. There is no return of your contributions, your contributions went to pay earlier recipients. No other federal tax method/ benefit can be rationalized either that I can think of.

Seldom does anyone making this argument take into account the tax-deductible employer's contributions to fund the program, or the loss of ~14 years of contributions (exceeding the 35 years counted) into SS that both the employee and the employer pay into SS. The SS is just another form of federal social program with the exception of it has its own method of funding the program and how they determine the benefit payout.

The sooner we stop trying to figure a SS breakeven point of SS taxes vs benefit, the better IMO.

The problem as I see it is that you and others get all wound up in your underwear on the PAYGO aspect of the SS system and that while it functions like a contributory pension it isn't funded like other contributory pensions and you ignore the econmic substance of SS for the taxpayer/recipient.

The economics are pretty simple... the worker is mandated to pay taxes on earnings and then later is eligible to receive retirement benefits for life based on a formula.

If you look at it from the taxpayer's perspective it is very similar to a defined benefit contributory pension. Contributions are mandatory and are based on earnings. There is a defined benefit formula (bend points in the case of SS). If you die before you get to retirement age then your survivors may be entitled to benefits. The portion of your benefits that you paid in isn't taxed (albeit more crudely than contriutory pension benefits).

The fact that it isn't funded like a defined benefit pension plan with plan assets is different but not particularly relevant.

There is no loss of 14 years of contributions to be considered if one is just looking at cash flows and calculating an internal rate of return... those 14 years of contributions are included in the IRR calculation. If all years of earning were considered then the bend point percentages would be lower, that's all. Many pension plan base benefits on highest yeas of earnings just like SS does.

What I was responding to was the notion that SS was an "interest free loan" and other assertions that are made that SS is a raw deal. If one looks at the numbers... the cash flows... what you pay in that relates to retirement benefits compared to what you receive in retirement benefits, SS is a reasonable deal... especially given that many people have no propensity to save so SS becomes their primary source of retirement income and reduces senior poverty... as intended.

Actuarial Note

 

[almost there]

The country was in a pickle in 83/84. So drastic things took place. Not sure anyone realized they had planned on taxing SS forever though. SS is a great deal, if you stay healthy & live a nice long time.

 

[almost there]

The int free loan was not accurate. Agree. But it depends how you look at Fed. tax's. SS is 5.2% of the GDP.
It would be nice to think my tax dollars fund the good programs and not the useless wastfull ones. But thats just not the case. Money is a shell game in Washington. It just gets shuffled around into obscurity.
And SS is / was no different.

 

[pb4uski]

^^^ No! SS is different. SS is ring fenced and is totally separate from the rest of the US government. It has income of SS taxes, income taxes on SS benefit payments and interest from special issue US government bonds from the general fund. It has expenses for benefits to survivors, disabled and retirees (and their spouses and in some cases children) and administration. That's it.

 

[pb4uski]

The country was in a pickle in 83/84. So drastic things took place. Not sure anyone realized they had planned on taxing SS forever though. SS is a great deal, if you stay healthy & live a nice long time.

No, they definitely planned on taxing growth from SS forever but not taxing return of contributions, similar to contributory pension plan benefits... they specifically stated that.

 

[almost there]

No, they definitely planned on taxing growth from SS forever but not taxing return of contributions, similar to contributory pension plan benefits... they specifically stated that.

Since 1983, every US President has borrowed from Social Security to pay for government expenditures.

 

[Gumby]

Every time the US government issues a Treasury bond, it is technically borrowing money. The Social Security Trust must invest somewhere. It can't just keep dollar bills in a warehouse because it needs earnings on its money, just like you do. Social Security invests by purchasing special treasury bonds. Those special treasury bonds are backed by the full faith and credit of the US just like any other treasury obligation. And, like any other treasury, they are as good as cash. It is simply untrue that Social Security is funding the rest of the government.

P.S. -- Presidents don't fund the government nor do they borrow money. Only Congress can do that.

 

[pb4uski]

^^^ This. What almost there wrote was false.

And its more the inverse... the SS Trust Fund has had surplusses and had to invest somewhere and by law their only option is to invest in special issue US government bonds. They would do this irrespective of the general fund's needs. The fact that the Congress spent more money than they had has nothing to do with the SS Trust fund. If the SS Trust fund didn't exist then the government would simply have had to borrow more from the general public.

 

[almost there]

^^^ This. What almost there wrote was false.

I literally cut and pasted that statement in.
I never said they were stealing money out of SS. If thats what you are thinking.

If only there was a magic Google box, we could copy and paste statements into for results.
Try it, you might like it.