Poll: What is your SS payback period?

[USGrant1962]

4.9 years due to paying SE Tax on part time consulting income for the last 8 years (and not escalating the early years). Seems right as most calculate 3.X years and counting employer would double that to ~7.5 years for any W-2 wage earner.

And I'll continue part time consulting as long as I feel like it, so will add more to the numerator without changing the denominator much due to the 15% bend point.

 

[L-5Player]

if you are retired and haven't yet started SS then the adjustment would be $0 since you are done working.

Oh yeah, that's me. Retired 5 years ago. No more SS tax to be paid! Thanks for the confirmation on PIA.

 

[Winemaker]

Were you surprised that it was only 3.5 years? I know that I was quite surprised. The power of compounding and the employer contributions I guess.

Not at all. I had some heavy duty discussions with my late DMIL, a state government employee, back when Congress made the changes to the original SS, back in the 1980s. While I explained the 'Ponziness" of SS, we did some back of the envelpoe calculations when she was just about to retire and start collecting SS. We used her present day FICA deductions, multiplied over her work period. She had her SS statement that showed her 65 FRA amount and a statement using her ex-husband's benefit which was significantly different. Her payback was 3 years, and using her ex's was 2.5. I told her that I would be saving profusely as I didn't think it would be around for DW and I.

While I won't be collecting until June 2028 at 70, as of my last statement, DW and I will be collectively receive $72k annually. Unsustainable, in my eyes.

While I was a high earner in my latter part of my career, my benefit is skewed somewhat by my early w*rk years in high school and college. While w*rking a minimum of 32 hours/week while in HS/college, and intern w*rk assignments at various coal mines, I made up to $12k in 1977-80. Going through DF's tax returns while cleaning out my DM's house, he made 19-21k during the same period as a father of 4. My benefit is also skewed since I retired after turning 56, 11 years ago.

 

[CautaServans]

Mine is 5.7 years, including my employer's contributions.

 

[tutan]

3.3 years. Not collecting yet. Retired at 56.5 years old.

 

[pb4uski]

Mine is 5.7 years, including my employer's contributions.

So ~2.85 years based on just your contributions taxes.

 

[CautaServans]

So ~2.85 years based on just your contributions taxes.

Yes! I changed my vote!

 

[SecondCor521]

2.5095 years for me. Voted appropriately, to provide scientific advancement to the field of Social Security retirement planning.

The number will change a bit over the next 14 years. I have a small side gig on which I pay both halves of FICA which will raise the numerator a bit and also my PIA a bit because I'm replacing a few very low or zero years in my 35 highest years of SS earnings. Not enough to change my vote probably.

Add me to the list of people thinking that one should include the employer portion of FICA taxes paid, as well as making some accounting for the pretty extensive TVM - 2.5095 years assumes zero inflation and zero return over 50 years which is a stretch.

I also think there needs to be structural reform to SS, and that it is a lousy investment but a somewhat adequate social safety net. As far as structural reform goes, I refer you to our collective work on other threads where we have already solved the problem multiple times. Congress should be able to take note and fix the problem at their earliest convenience.

 

[AudiDudi]

By the time I filed for mine at age 70, I had already received more than I paid in due to drawing spousal for 4 years. It took less than 18 months more to collect what my employers had paid in.

 

[Sunset]

I didn't count my self employment time as it was partial and makes it too complex, my number comes out to 2.7 yrs.

It represents the $$ as if I stuffed it under the mattress, as long as I live long enough

 

[pb4uski]

This is too much like homework. ...

....Add me to the list of people thinking that one should include the employer portion of FICA taxes paid, as well as making some accounting for the pretty extensive TVM - 2.5095 years assumes zero inflation and zero return over 50 years which is a stretch. ...

I agree with you on including the time value of money but it would increase the calculation complexity exponentially and I was just creating a poll since one poster in the other thread had framed a similar calculation and it is pretty simple to do.

In post #13 I shared my IRR analysis results which is just a different form of TVM calculation... solving for the discount rate rather than the NPV. One benefit of the IRR approach is that you don't have to have debates on what discount rate to use since you are solving for the discount rate at which the NPV of the cash flows is $0.

I'm thinking using only your contributions is more appropriate, especially since the benefits (bend points, percentages, etc) are designed considering both employer and employer contributions. You are getting the payback based on what you paid in taxes and what your employer paid is included in the denominator. In other words, if there were no employer contributions then your benefits would only be ~1/2 of what they are and your payback would be twice as long.

 

[USGrant1962]

I didn't count my self employment time as it was partial and makes it too complex, my number comes out to 2.7 yrs.

It represents the $$ as if I stuffed it under the mattress, as long as I live long enough

I don't understand how you didn't count SE, how did you separate it? Your total paid (employee tax plus SE tax) is a single number on your SS statement under "Social Security taxes You paid:"

 

[deserat]

I do, because I was the employer.

Yeah - paying that extra employer part on top of employee is brutal.....

 

[mrfeh]

So to summarize... (90% * SS taxes paid)/PIA/12

Wouldn't normally take part in something like this, but just happened to download my statement a few days ago...

Using this formula: 3.15

 

[ERD50]

This exercise is to compare what you paid into SS to your monthly benefit at your FRA (aka your primary insurance amount). ...

To me, it seems like this description is very much at odds with your title/poll.

What you have described is a formula. You might see some use in that formula for comparison purposes (though I'm not sure what?). But it is in no way a "payback period" because (as others have pointed out), it ignores the time value of money.

The $'s I contributed in 1975 are the same as the $'s I contributed in 2000? We know that is not the case.

 

[pb4uski]

^^^ No, you don't get it.

The payback period is the amount of time required for an investment to generate enough cash flow to recover its initial cost. It is a simple, commonly used capital budgeting metric that helps businesses assess risk and liquidity, with shorter periods indicating lower risk and faster returns

In this case it is the number of months of benefits (time required) to generate enough cash flow (receive enough benefits) to reccover its initial cost (SS taxes paid).

Payback period as defined in finance does not include the time value of money so I'm not sure why you are objecting. It is initial cost divided by future cash flow benefits:

So I think is as close as we are going to get. The awkward part is the the initial cost is paid over 30 years whereas it is usually paid out in a shorter period of time.

If it bothers you so much, propose something better.

 

[ERD50]

^^^ No, you don't get it.

In this case it is the number of months of benefits (time required) to generate enough cash flow (receive enough benefits) to reccover its initial cost (SS taxes paid).

Payback period as defined in finance does not include the time value of money so I'm not sure why you are objecting. It is initial cost divided by future cash flow benefits:

... So I think is as close as we are going to get. The awkward part is the the initial cost is paid over 30 years whereas it is usually paid out in a shorter period of time.

If it bothers you so much, propose something better.

I think that formula is assuming the investment was made as one lump deposit. The 'awkward part' as you put it, is exactly this - the payroll deductions were made over time. And if I stick with your verbal definition here, the "number of months, etc..." is going to be ~ 40 years for the 1st payroll deductions I made, and it decreases as you go forward in time. So it is a series of payback times, and I guess you could average it out somehow to come up with one number.

"If it bothers you so much, propose something better." Well, that "something better" is pretty complex. I'd consider the time value of each payroll deduction. And then you have to consider the value of things like Disability Benefits, which are also paid out of FICA (I think). And in the end, there is nothing I can do with that number, since I have no control (other than choosing a start date to take SS). But it is still valid to point out the issues with what has been posted, whether I can provide a better alternative or not.

But, you can put this into AI: "How to calculate financial "payback period" when the investment was made over a period of years?" and they give a simple example like this, which is probably a better alternative:

So you have to go back in time to find the years those payments were made. This is making more sense to me - If I stop working 10 years before I take my 1st SS benefit, how can my payback be anything less than 10 years? It took that long to get anything back!

They also address the time value later on. And to me, even though it seems that the financial formulas don't include the opportunity cost of the money, that seems absolutely critical to my personal situation. Instead of saying the $600 I put in 40 years ago should be increased by inflation, I'd say it should be increased by an investment return. That really changes things.

But again, too much work for me for something that is not actionable.

 

[SecondCor521]

In post #13 I shared my IRR analysis results which is just a different form of TVM calculation... solving for the discount rate rather than the NPV. One benefit of the IRR approach is that you don't have to have debates on what discount rate to use since you are solving for the discount rate at which the NPV of the cash flows is $0.

Sure. Although one only knows the IRR at their funeral, at which point it's not practical to compare that to other investments or a hurdle rate. ;-)

I'm thinking using only your contributions is more appropriate, especially since the benefits (bend points, percentages, etc) are designed considering both employer and employer contributions. You are getting the payback based on what you paid in taxes and what your employer paid is included in the denominator. In other words, if there were no employer contributions then your benefits would only be ~1/2 of what they are and your payback would be twice as long.

I agree with you on the denominator. The argument is that what our employers paid should also be included in the numerator, because it's money that was paid into the SS system on our behalf. I understand we differ on whether that money should be considered to have been paid by us or not, and I agree that is a thornier question. We can disagree on this point and still be friends I hope.

 

[pb4uski]

That's the beauty of payback, it is simple and useable... warts and all.

I intentionally didnt ask people to do the IRR type analysis that I described in post #13. While I think that is a better approach it is so complicated that very few people would bother to do it.

But I think the payback is an interesting indicator for those Debbie Downers who fret that they'll never see what they paid into SS. The reality is that they get back what they paid in very quickly, in 3-4 years, based on the results of this poll.

If the average person lives to be 82-1/2 then someone claiming at 67 gets roughly 4-5 times what they paid in, so not the rip-off that some posters claim.

 

[pb4uski]

Sure. Although one only knows the IRR at their funeral, at which point it's not practical to compare that to other investments or a hurdle rate. ;-)



I agree with you on the denominator. The argument is that what our employers paid should also be included in the numerator, because it's money that was paid into the SS system on our behalf. I understand we differ on whether that money should be considered to have been paid by us or not, and I agree that is a thornier question. We can disagree on this point and still be friends I hope.

Since I don't know when I'm going to die that is why I choose to look at a table of IRRs at different attained ages (the table in post #13)

Sure can disagree and remain friends, but one final thought. Let's say that you are building a building for $100 million and the investment will provide $10 million a year of cash flow. A nearby city is keen for you to locate there and agrees to chip in $10 million towards the cost if you build in their city, so your net cost would only be $90 million but your would still receive $10 million a year in cash flow.

Is your payback 10 years ($100m total cost of the building divided by $10 million annual benefit) or is it 9 years (your $90m net cost for the building divided by $10 million annual benefit)?

I think most CFOs would say that your payback is 9 years and that the numerator is what you paid and not what both parties paid combined.

 

[mrfeh]

Getting off on tangents here, but I wouldn't even use the word "payback".

The money going into the system now is being distributed to those receiving benefits. Current recipients aren't getting their money back.

Makes me want to look up what kind of benefits the initial recipients received, as they never contributed.

 

[pb4uski]

You're confusing funding and legality with economics. Economics are based on cash flows... what you paid out and what you received irrespective of whether what you paid out was a tax or a retirement plan contribution or whether you have a legal right to receive benefits prospectively or not.

The last part is interesting. There must have been some minimum benefit. And to be clear it is that they never paid SS taxes rather than they never contributed.

 

[Perryinva]

Interesting “poll”, to me, as I had done this years ago, out of curiosity, as looking at DWs SS statement before she filed at age 62, I was surprised at how low her total contributions were.

She was a low earner, and retired at 56 (living off of my income). While I wouldn’t call me a high earner, my earned income was high enough to have 35 years of maxed out SS contributions (last 30 the highest for SS calculation) out of the 39 years I was an employed salaried (plus OT) engineer since college graduation. I actually had a 40th year of income that was shy of full SS because I retired with a VSP at 61, that paid me my last salary, monthly, for an added year, plus a bonus plus I was required to start my company non contributory pension. (Double dip). Since I retired at end of May 2019, that made 2019 my largest income year ever, and for 2020 I paid in for the year that same amount through May, then actually started another short similar employment for 2 more years, for something to do when Covid hit. I also had 4 added years of small SS subtractions as I worked at typical pre career jobs since I was 16.

So for practical reasons, my SS, filed at FRA, is the same as someone who made 10 times what I did, over the same period. My contributions to SS then, was many times what DW contributed while her reduced PIA was only just less than half my FRA PIA, so her payback was much faster than mine.

We went through this exercise because I was trying to convince her to not file until I retired, as we didn’t need the income, were both in good health, and much of it would just go to pay more income tax. She is 5 years older though, and I was 57 at the time and planned to retire at 64, but she absolutely didn’t want to wait 7 years until age 69 to file. She point blank wanted to contribute some income of her own, as she had not for the last 6 years besides a small pension amount that started at her age 58. It bothered her a lot.

The reality ended up being that while the percentage increase looked high, the dollar amount really didn’t make any difference either way. Her payback of the penalty for filing early easily was covered well in to her 90s as it simply meant I invested her amount, at a time when ROIs were very high, the income being fungible. Her contribution payback was under 3 years and mine was about 3.8. So I haven’t hit mine yet, but at age 73, she flew past hers years ago.

I had also done an inflation adjusted version, of just mine, but only using each years full amount (rather than monthly) adjusted for that years inflation through FRA, and it was not surprisingly, MUCH longer, more than double, off the top of my head, as I remember thinking I’d be well in to my 70s before I got my contributions back, and in to my 80s before I got my employers as well, whereas DW would get both hers and her employers contributions back in her early 70s.

 

[jollystomper]

Using the formula in the first post, my payback result is 3.32 years. DW's is 1.02 years. She took her SS a few months after turning 62, and is well beyond this payback period.

 

[Exchme]

The methodology is quite strange. Starting with the employer side contributions - ask any self-employed person if the employer side of SS taxation is real. Then consider that those costs don't somehow disappear if someone else is paying your salary, any employer has to consider the fully burdened cost. So we need to immediately double the amount paid in to account for this.

Then there is inflation. While those long-ago taxes look small, after correcting for inflation, they are several times the size they appear. My 1981 SS "contributions" would be 3.6 times the size if they were adjusted for inflation.

Finally of course you had to forego stock and bond returns on this money for many years, what rate of return would you need to have in order to be glad to have chosen to have all those wages taken from you for all those years? Though my SS taxes in 1981 were modest, they would have returned 157x (nominal), 43x (real) if I had been free to invest in the S&P 500.

So I don't think any "payout" that folks are seeing is really very impressive.