I know - what I thought was “very odd” was to say that $8600 a month “May not seem like a lot”. No matter what the sources are.
It may have bought more back in 1988, but the amount you put into your investment account, was still only $2300. That’s the figure you use for calculating return, not $5700.
That’s why I said “most people.” There’s only a small number who contribute for any significant amount of time, never have a period of disability, and die before retirement, leaving no spouse or dependents
Earning an average of five percent over the entire period is not the same thing as earning five percent every year. Remember the example of the stock that gains 100% one year and loses 50% the following; your average gain is 25%, but your net gain is zero. In the case of calculating yields over a working career, the early years in which you are taking bigger risks and hopefully earning bigger rewards are also the years in which you have less money at stake. Compare earning 10 percent in a year where your portfolio only totals $50K to earning 2 percent when your portfolio totals $500K. The simple average is 6 percent, but the weighted average, reflecting how much more money was only earning two percent, is 2.72%. If you’re going to estimate the total return with any degree of accuracy, you need to weight the average by how much money is at stake at the time, and I think estimating a total average yield of five percent does not accurately reflect that when you have the most money you are likely earning the least return.
That’s not actually accurate, because SocSec is figured on your highest 35 years of earnings. That means that in a 40-year career you can have five years of zero earnings without necessarily affecting your benefit (depending on where in your career it falls), but with our hypothetical alternative, even a single year of reduced earnings will always reduce the total.
It does, however, have a bearing on the comparative worth of the Social Security benefit versus the alternative. Knowing you’ll have $X in your investment account at age 62 is interesting, but you can’t compare that to what you’ll get from SocSec unless you make some assumptions about how long you expect to live.
For example, suppose you have an investment value at age 67 of $400K. If you are earning four percent on that, you’ll have income of $16K/year. Can you live on that sum, or are you going to have to dig into the principal, and if so, for how many years can you do that before the principal is gone and you’re out of money? If you spend the money as though it has to last you fifteen years, but you actually live twenty, you’re in a world of hurt. Meanwhile, you cannot outlive your Social Security benefits. If however you die much sooner, then you may be able to leave your heirs a nice nestegg, whereas SocSec stops at your death unless you have dependents.
I mean the total stock market, assuming you’d want to diversify your investments; I think the comparable figure for the S&P 500, including reinvested dividends, is around eight percent. Dividend yields have been falling for some years, and some of the most heavily-weighted stocks in the S&P, such as Amazon and Berkshire Hathaway Class B, pay no dividends at all.
Maybe instead of throwing out random numbers we should turn to actual known figures:
Average annual S&P 500 return
5 years (2018-2022) 7.51%
10 years (2013-2022) 10.41%
20 years (2003-2022) 7.64%
30 years (1993-2022) 7.52%
As I said, 5% over the long haul (even allowing for a shift to more conservative investements as you start running short on time to recover from the occasional dip in the market) is conservative.
Agree. In essence, all taxes tend to redistribute money. Unless you are categorically opposed to any taxes, you have to accept the fact that some of your taxes do not accrue to you as benefits. Non-drivers, as an obvious example, still pay for road upkeep. In the largest sense, it is a way to promote the general welfare - one of the purposes of our government. I also agree that benefits should be means tested. If you’re able to live ok on your retirement income, maybe you don’t need to supplement it with Soc. Sec. benefits. I know that “to each according to his needs” is a potent and poisonous phrase for some people, but the concept seems to be eminently fair.
For the most part, the road users supply these funds. Both the federal government and the states rely on imposts - fees and taxes - on users to fund highway programs. Highway fees consist of motor-fuel taxes, vehicle registration fees, license plate fees, and certain levies on heavier vehicles such as trucks. Augmenting these is the most direct of all highway user fees - tolls.
You have to find a way to sort of means test without actually making it a means test - raising the taxability to 100% or increasing the income that’s taxed but not that used to calculate benefits or change other provisions to take effect far in the future or something * . Because if you just impose a means test two things will happen - first, the people who have been paying in for years will revolt - they have been planning their retirement for decades with SS as part of it and now you are taking it away. And even if it’s only very wealthy people at first, it’s a foot in the door and maybe it will eventually hit people who have what seems like a lot of money, but really isn’t if it’s the only income you will have for the rest of your life.
Second thing is that once it’s means tested , it becomes “welfare” and loses a lot of support.
* It made sense way back when to give a spousal benefit but it might make sense to change that now - maybe not eliminate, but change. I’m not sure why it’s necessary to (for example) increase my husbands benefit because his own is less than mine or if he doesn’t qualify on his own. Maybe it made sense to give a benefit so that young widows who are caring for young children didn’t have to get jobs - but it makes less sense now, when lots of women with young children have jobs. ( Not talking about the children’ s benefit, there’s one for the parent of a child receiving SS benefits)
Highway funding, yes.
Road funding, no. Generally, local roads are funded by sales and property taxes, depending upon the state, county or municipality you’re in. They typically don’t have a funding source from the state or feds unless you’re talking about a thoroughfare signed as a state or U.S. route, which may give them some funds to aid in construction and upkeep.
Sorry for the hijack. I’ll be happy to participate in a separate thread should one be started on the topic.
So I guess your answer is that we couldn’t possibly find a way to calculate the value of an account, for an average worker, if that worker’s social security tax were instead invested in the market?
Because all you’ve done is quibble with the parameters of the hypothetical, without, I might add, actually offering your own parameters.
You don’t owe me the calculation I asked about, but you don’t need to punchbowl it either.
If Biden promised not to raise taxes on anyone making less than $400k (and setting aside the wisdom of that threshold — I’m sure we all have opinions,) I’m wondering how much removing the payment cap only for people making more would raise. Vs removing it for everyone making over the current cap.
Again it goes back to what counts as income. For current SS taxation, it’s wages and only wages. Not stock options, not investment income, not business owner / partner income, etc. IANA expert on this last point, but IIRC certain forms of employer-paid bonuses are not considered wages either, while others are.
A comparatively small number of people have wages over $400K. IMO compared to that number, a lot more people have income over $400K. Statistics are hard to find on this.
I’m getting some hits when I include “donut hole” in the search, but nothing quantitative so far.
Incentive Stock Options, if you consider them a form of bonus, would be the prime example of what is not considered wages. Sometimes they can lead to an AMT adjustment that effectively gets them taxed at a rate closer to “ordinary” income but never FICA/Medicare.
There’s lots of information on household income, but not on individual wages that I could find. That’s two factors removed from the data we seek.
SSA can tell us how many people hit the SS wage maximum, but they have no idea whether somebody exceeds the max by 1 dollar, 100K dollars, or 10 meeellion dollars.
I think they might have this infomation, because the Medicare portion of the wage tax doesn’t max out. I know this because our partnership did a whole thing to convert wage income to partner distribution after a certain point (above Social Security max) to save the Medicare tax. So if I make $250,000 per year in wage income, the government certainly knows that. It’s reported on the same W-2.
I just lost a huge post where I Feynmanned my way to the conclusion that @Ruken’s proposal would add about 4% to the total SS tax revenue for a year. Enough to help, but not enough to revolutionize the SSA’s overall balance sheet.
@Procrustus. Yeah, wage income is totally known to IRS via box 1 on everyone’s W2 and by the SS Medicare info as you say. For whatever reason that info is not as readily available to us outsiders. At least not that I can find.
And as your example shows, high earners in small-ish business have a lot of room to shift their income distribution between their wages and their ownership pro-rata distribution of the business’s profits. I’ve certainly done that dance when I was in business as did my now-deceased first wife who was an attorney. The optimal answer to the distribution question has changed a lot over the years as the tax laws have changed.
Any calculation about how much any proposed tax change will net in revenue needs to account for all the ways the public will react to try to minimize the effect of the proposed change. The only group more creative / inventive than the government lawyers in the tax law-writing department are the non-government lawyers in the tax-avoiding (and tax-evading) business. 
A lot of income from equity awards is taxed as wages. Specifically, it’s the value of restricted stock units (RSUs) at the time of their vesting, or the bargain element of incentive stock options (ISOs) at the time of their vesting (difference between strike price and market value) if the stock is not held for at least one year. The gain on RSUs and ISOs after they vest, and in the case of ISOs where you hold the stock at least one year, the gain between the grant and the vesting point, is taxed as capital gain. And that’s probably as it should be, because most of the earnings there are due to the efforts of the entire organization, and you had the opportunity to dump the stock immediately but decided not to.
No, I’m willing to do some work to calculate the value of an account, but first we need to establish the purpose and parameters here. For example, if the value turns out to be $425K (or $250K, or $750K), is that good or bad? What are you comparing it to? Without making some assumptions about lifespan and standard of living, I don’t see that it’s anything but a meaningless figure, and what’s the point of the work to establish a meaningless figure?
I’m just interested in whether the amount a typical person puts in could, if appropriately and relatively conservatively invested, yield more than the current benefits. That’s really it. And the conservative part is just meant “with reasonable assurance the money will be there when needed.” After all, pensions aren’t 100% in treasuries.
Right now, as I understand it, the money in is mostly going right back out for current benefits. But that, as I understand it, wasn’t the case in the past. Furthermore, as I understand it, the excess money was held in treasuries, which in recent years have not returned much, and not returned better than the S&P. Put another way, never minding whether it’s a good idea to mix “government” money with the markets, would that be a good way to “save” social security?
As this is not my area of expertise, I’m open to anyone’s reasonable assumptions.
Define the current benefits. The current program includes retirement benefits (which can be calculated with reasonable accuracy given some basic assumptions), but also disability and survivors’ benefits, which take more fiddling. The amount taken from your paycheck/paid by your employer includes all of this in one OASDI (Old Age, Survivors, and Disability Insurance) deduction. The cost of separate disability insurance, to name one example, depends on your occupation, your age and current health, what part of the country you’re in, how much you’re earning now and what percentage of that you want to replace, etc. If you have dependents, you’ll want to purchase a private disability policy large enough to provide for them, but SocSec disability gives each of your dependents a separate check of their own (up to a family maximum); in some cases, even your ex-spouse is legally entitled to a payment on your record without ever having contributed anything of their own. Your child born with permanent disabilities (or disabled in childhood) may be able to claim on your record for the rest of their natural life, even 50 years or more after your own demise, without ever being able to work a day in their life. How do we account for that so we are actually comparing apples and apples?
I’m really not trying to be difficult here; I’m trying to make the point that this is a pretty complicated comparison, more complicated than perhaps you realize.
Right now, it is ALL going back out for current benefits; for several years now, the trust funds have been paying out more in benefits than is received from taxation (they’re redeeming the IOUs). That’s the root of the problem; the funds will be exhausted over the next decade or so, and then the taxes coming in won’t be enough to pay more than 75-80% of the benefits promised. Historically, the majority of the money collected has gone to current benefits; even in the years (e.g., the early 2000s) when the trust funds were socking money away hand-over-fist before the baby boomers started retiring, benefits paid were never less than 70% or so of the incoming monies. (For the Old Age and Survivors Trust Fund, the last year when current benefits did not account for the majority of the money coming in was 1950; for the Disability Trust Fund, 1958 [retirement/survivors benefits were first paid in 1940, disability benefits in 1957].)
Historically, the S&P has indeed had significantly better yields than treasuries. In recent years, the SocSec trust funds have totaled close to three trillion dollars; the total market capitalization of the S&P 500 has varied from around $21 trillion to nearly $40 trillion (it’s currently around $32 trillion). That implies the trust funds if invested in an S&P 500 index fund would have an outsize impact on the markets; I’m not convinced the addition of that much money would cause the market to continue to behave in line with historic trends, even not considering the opportunities for graft and corruption and insider trading and other sins that tend to occur when public and private money gets mixed together.
I recognize it’s extremely complicated. But my approach would be to start with some assumptions and make a first pass. One could then refine and debate the assumptions. I’ve done a lot of business development in my career, and when we’re trying to figure out whether to invest in a project we don’t let ambiguity paralyze us. Someone puts out a model and then we argue over how it should change.