In the U.S. can an individual’s cumulative Social Security benefits ever exceed the amount they paid into the system, even taking into consideration accumulated interest on contributions? Is there a ‘break-even’ age beyond which point one’s benefits exceeds one’s contributions?
I’ve observed this come up a couple times in discussions with retirees. Some retirees claim ‘I’m just getting back what I paid for’ and others claiming they’ve received more than they ever paid in.
To make a slightly more specific example, how about a taxpayer, who was born in 1920, started a blue-collar career in 1940, retired and started collecting benefits in 1985 at age 65, and is now at age 86 still collecting Social Security payments?
I would expect that payments and payouts are based on some break-even point associated with expected life-times, but who knows?
Why would you assume that? It isn’t an individual interest account. It is pyramid scheme in which receipients are paid by current workers in the hopes that the same will happen to them before the system falls apart. The system has little tie to how much an individual paid in and early beneficiaries got back many times what they ever paid in. No one can really predict what is going to happen as the system gets forced apart in the next two decades.
Social security is going to run into huge trouble sooner or later. Bush tried to bring the issue up before it was a full-blown crisis but those types of alarms rarely work.
Social security’s Achilles heal is a population shrink in the younger population with older people living longer. Both are happening right now.
Europe has invested much more heavily in that type of scheme than we have in the U.S. and the negative trends are much stronger which is going to cause dire consequences in the next 20 years.
Hey Shagnasty! Correct me if I’m wrong (and feel free to plead equally ignorant), but wouldn’t Social Security be trucking along just fine with no major impending shortfalls if the government had not repetitively scooped out its funding for use in other parts of the budget? That is to say, that if the revenue from Social Security taxes had been used only for Social Security (including any interest it could generate at any times when it was running a surplus) and not “borrowed from” to cover shortfalls in other parts of the federal budget?
I did a quick calculation based on some assumptions. If your blue collar guy worked every year from 1940 through 1986 and earned the maximum wage for social security purposes, he would have paid about $23,000 in social security taxes during his working life. You could reasonably double that for the amount his employer also contributed. That would be $46,000. At a 5% interest rate, that would have been worth about $67,000 in 1986.
I can’t find a good source to figure what he would recieve as a monthly benefit in 1986 but that $67,000 would not have lasted long. Your hypothetical retiree has done very well with Social Security.
The shortfalls in social security are not caused by Congress “borrowing” from the trust fund. The shortfalls are caused by extending social security beyond its intended purpose, by having a cutoffoff level for wealthy wage-earners to top out in paying their social security taxes, and by the changing ration of workers to benefit users.
By it’s very nature, Social Security is indeed technically a pyramid scheme. Current beneficiaries are being paid by current contributors. Contributions are not invested for future beneficiaries. In fact, the principal itself is siphoned off by the rest of the government.
You do realize that there is no “Social Security Trust Fund,” right?
The whole thing is supported by faith in the U.S. Government.
The structure of Social Security would never be tolerated in any other retirement or pension plan.
Right. But remember, the amount paid in has not be steady. He didn’t pay in $1000 per year for 46 years. In the Social Security world, the early years had really low rates of tax / contribution. In 1940, you might pay 2% of the first $3,000. By my calculations, our worker didn’t personally pay more than $100 in a year until 1959. In fact, over half the total paid into the system happened in the last seven years of work (1980 through 1986).
The chances are very good that anyone who doesn’t die within a few years of retirement may receive more back than put in simply because of inflation. Payments are based on current values, not on 1940s values.
Calling Social Security a pyramid scheme is a common mischaractization. Technically, a pyramid scheme is based on current intake being paid out to past investors, but it must fail because it is exponential. That is, the same intake and payout are guaranteed to all and eventually the number of new entrants recruited into the scheme must exceed the total population. This is not true of SS. Any of a large number of variables can be changed: the amount of taxes charged, the percent of employer contribution; the current value due to inflation; the age at which payout starts; the annual income amount at which taxes stop being charged; etc. And the ratio of payees to payers, while dropping, will never go to zero.
The line “I’m just getting back what I paid for” is an emotional response rather than a literal calculation. Like insurance, SS is based on actuarial principals, so some people get more and some less. And payments are not adjusted to present day circumstances but have been unchanged due to political considerations, which may change at any time.
Yes, there is a Social Security Trust Fund. At present, Social Security collects more in taxes than it pays in benefits. The excess is borrowed by the U.S. Treasury, which in turn issues special-issue Treasury bonds to Social Security. These bonds totalled $1.7 trillion at the beginning of 2005. Social Security received $89 billion in interest from bonds in 2004. However, Social Security is still basically a pay-as-you-go system, as the $1.7 trillion is a small percent of benefit obligations.
The figure I’ve read is that the average social security recipient receives back all of the money he or she paid into the system within four years of retirement. Everything after that is a bonus.
Consider the first person to receive a monthly Social Security check, Mrs. Ida May Fuller. She paid Social Security taxes for three years, from the start of the program until her retirement in 1939. The total accumulated SS taxes she paid during those three years was a total of $24.75. Her initial monthly check in January of 1940 was for $22.54, almost recouping her contribution right there. She would go on to live another 35 years, to the age of 100, collecting a total of $22,888.92 in Social Security benefits.
I don’t know if anyone else has managed that level of return on investment from Social Security.
I wonder if any of you are considering inflation in all these calculations.
In 1936 $15 a week steady was EXCELLENT pay. Many people were unemployed and made nothing at all.
One of the guys I worked with many years ago who actually worked in the 30’s for the post office and had a steady job all through the depression told me (and I believe him ) that what seems today to be a pittance -------$15 a week-------was the best money he ever made in his life.
He didn’t have to do a damned thing. 10 guys would come by every day and offer to do any possible thing for him—paint his house, mow his lawn, anything--------for 50 cents a day. He said he felt absolutely rich at the time.—had what amounted to slaves to do his bidding.
At a minimum wage today of over $5 an hour and most making at least $3 more than that even in menial jobs------------I think some of us “moderns” lose touch with the past and the beginnings of SS in the '30’s.
What I am trying to get at as far as making calculations as to what is put in and what is taken out of SS -----I don’t think some of you are considering inflation.
Hell-------you could buy your own personal slave back in the mid 30’s for 50 cents a day.
Well, assume you pick an easy calculation. 90k a year for 40 years (age 27-67) you’ll earn 2,192 a month starting at age 67. You’d pay 446,400 into the system (90,000*.12440). So the equation would be 2,192X=446,400 with X being the number of months until you break even. X=203.
However this is for those who are at the highest end of the SS bracket. Assume you make 14k a year starting at age 27. After 40 years you’ll collect 758 a month. You’ll only pay 69440 into the system. 758*X=69440. X=92 months.
Well, thats wrong as that doesn’t include inflation. However the final results I got were in today’s dollars.
Inflation is tricky anyway as the real price of goods constantly goes down due to technology. So minimum wage in 2040 may be $17/hr but a six pack of coca cola will still only cost $6. Back in 1900 coca cola was five cents for a six ounce bottle. Now in 2006 you can get a 67.6 ounce bottle for one dollar. The price doubled per ounce and wages are about 10-20x higher now.
Keep in mind that the OP’s question related to a hypothetical person that retired in 1986. From the mid-1950s through 1990, the rate of tax on wages had grown steadily. Since we have gone 16 years without a rate increase, it is easy to forget that for many years people paid less than half the current rate. The maximum taxable wage also increase from 1950 onward to reflect the growth in wages. In effect, the tax steadily increased beyond inflation because the base and rate both increased.
People that paid the tax at the prior low rates and are now collecting at the higher rates have done very well for themselves. While its not a free lunch, it is certainly reduced price.
To keep this factal about what is paid in, here is the historical wage table. It shows the amount of wages subject to social security tax.
My google skills are a bit lacking but I’ve put together a table of the historical rate of tax on social security wages. I’ve only shown the years with rate changes. Keep in mind that the employee and employer both pay it. I have only been able to piece it together from 1955 forward. Hope it helps:
What I find interesting is the historical legislation has been anticipating the baby boom since at least 1971. At the time, they show the rate going to 5.35% in 2011. They didn’t seem to adequately anticipate the growth in lifespan or the size of the COLA.