Does Social Security Pay Us More Than We Paid In?

The implicit “deal” of Social Security is that we are forced to set aside money to pay for our elderly years, but we eventually get the money back. At least, that’s how we the people view the transaction. There are now claims, though, that because of longevity, we are getting back more than we put in, and that is what threatens the viability of the system.

The fact is, the reverse is more likely to be true. Past recipients have certainly been getting back more than paid in — far more, the older the person. And not just because of collecting benefits for more years. The other reason is that the older the person, the lower the rate of tax they were paying into the system in their early working years. The combined rate of Society Security payroll taxes paid by an employer and someone now 80 was only 4% in 1955, for example. Today workers and employers pay 12.4%. The Urban Institute, which has studied the matter, says someone who retired in 1960 would have gotten back more than eight times what they paid in.

As for someone signing up for social Security today, first the question of how much over a lifetime a typical worker has paid into the system. Say that person began working at age 22 at an annual salary of $8,000 or so in 1968 dollars and experienced uniform pay increases (however unlikely) ever since, arriving at $75,000 a year on retirement. Given the rates for all those years, that person and his or her employer(s) will have paid $167,700 is Social Security payroll taxes (Medicare is a separate subject).

But those are nominal dollars. The government cannot relieve us of $1,000 decades ago and then expect to hand us $1,000 back. With each year’s contribution adjusted to today’s dollar, the value of that $167,700 parked with the government amounts to $260,400.

Then there’s the question of how much is owed us for the use of that money. Surely we should impute earnings to our money that the government has used for its own purposes all these years. Inflation has already been accounted for in the conversion we just made to 2013 dollars. Because interest rates already factor in inflation, most economists would say that an additional 2% a year is a reasonable minimum assumption of what our money should have earned. Compounding that 2% for those 45 years means the $260,400 account should show that the government owes our prototype taxpayer $401,500.

That’s quite a sum. And if we assume that this individual could have done better with the money — say 3% a year — then $509,700 would be the number.

How much that person then receives depends on other variables — whether he or she opts for benefits at ages ranging anywhere from 62 to 70, how long one lives, etc., so we must deal with averages.

What sample averages say is that, for the first time, certain circumstances will cause retirees to receive less than they paid in. The Urban Institute calculated the example of a two income couple, each earning an average of $44,600, who opted for Social Security at 65. They had paid in what, with inflation and reasonable interest added, should be valued today at $600,000. But they can expect to receive only $579,000 in return.

That’s something of a special case — benefits are reduced when both spouses receive benefits, different income levels produce different results — but the trend of getting less than paid in is sure to accelerate in coming years as new enrolees will be those who have been paying the higher 12.4% payroll tax rate — which reached that level in 1990 — for more years than those who went before.