Will you get your money’s worth from Social Security?
Many are sure they won’t.
But today we’re going to see how the actuaries for Social Security apply a “money’s worth” test to the largest tax most Americans pay. We’ll see who gets more than they put in. And who gets less.
Buckle up.
Before we start, there are a few things you need to know that most people, including some very talkative politicians, don’t know or understand.
The first is that Social Security isn’t an investment program. It’s an insurance program. It redistributes. It takes money from people who are working and distributes it to people who are retired or disabled. It also takes money from people who earn more money than others and distributes it to people who earn less money than others.
One result is that some people get more money back than they put in. Others put in lots of money and get relatively little back. If you view what happens through investor eyeglasses, it doesn’t make much sense. But if you consider that it serves to reduce or eliminate poverty for tens of millions of people, it makes a lot of sense.
Social Security reduces some of the risk we all face in life.
Another result is that angry crowds of seniors aren’t roaming the streets burning buildings — or camping out in your house while they roast your dog for Sunday dinner.
So if what you get out isn’t proportional to what you put in, what gets you more, or less?
The big levers are your earnings, your gender, how long you live (affected by your race and gender), the year you were born and retire, and your marital status.
It’s not a lottery that enriches randomly, but some people will always do better than others.
What’s behind the figures.
To calculate your money’s worth, the actuaries calculate the present value of all the benefits you will receive and divide it by the present value of all the employment taxes you have paid or will pay. If the result is less than 1, you don’t get your money’s worth. If the result is more than 1, you get more than your money’s worth. That may not feel like a good thing, but in the big picture it is.
Here are the major findings, culled from the most recent study by the actuaries for Social Security.
The biggest winners.
If you’re a lower- income, one-earner couple, you’re on top. A very low-earner, one-income couple born in 1955 and turning 65 in 2020 will get $2.98 for every dollar put it. My bet is that most readers will understand that such couples need every dime of those benefits.
Couples with a medium-income single earner of the same age get $1.64 back for every dollar in.
And a maximum-income single earner couple will get $1.03 for every $1 put in.
The single-earner couple pays only one set of employment taxes. But is eligible for two benefits and collects benefits longer because the joint life expectancy of a couple is a lot longer than the life expectancy of a single man or woman.
The most certain losers.
If you are a maximum-income single man, you’ll get only 54 cent for every dollar you put in. Women of equal earning power do a little better (62 cents) because they live longer. Ditto a maximum income two earner couples (62 cents).
Most people are winners.
If your income is “medium” or lower, you’ll break even or a good deal better today and if you reach age 65 in future years. Even if your income is ranked as “high,” you’ll mostly likely have a money’s worth ratio of 0.85 or better. That, by the way, is the money’s worth of a typical private life annuity.
Only the most well-off lose.
If you are a maximum earner, marriage to a non-worker is the only way you’ll hit 1.00 or better. Think of it as the “Leave It To Beaver” option.
Otherwise, your money’s worth ratio will be about 62 cents. (A “maximum” earner, by the way, isn’t someone who plays for the NFL. It’s anyone who consistently earns at or over the wage-base maximum for Social Security. That’s currently $128,400 a year. About 6 percent of all workers earn that much or more.
It’s important to note that being a lifelong maximum earner isn’t guaranteed. Life may throw a reason to appreciate Social Security for its insurance value.
Since none of these money’s worth figures take the taxation of Social Security benefits into account, the spendable money’s worth for people who have saved or have pensions will be lower.
The people to worry about are young adults and children.
Since Social Security will exhaust its trust fund in about 13 years, the actuaries also examined the money’s worth ratio assuming that either employment taxes were increased enough to pay the scheduled benefits or future benefits were reduced so existing taxes could pay the lower benefits.
Either way, those born in 1973 and turning 65 in 2038 will get a worse deal than today’s retirees. The worst deal would be a straight benefits cut. The actuaries project, for instance, a money’s worth ratio of only 76 cents for medium income single males born in 2004.
The bottom line here is that those already retired or about to retire don’t need to worry about their Social Security.
But we all need to worry about what we’re leaving our kids.
Related columns:
Scott Burns, “Is Social Security a Good Deal,” 7/05/2013
Sources and References:
Money’s Worth Ratios Under the OASDI Program for Hypothetical Workers, Actuarial Note No. 2017.7 https://www.ssa.gov/oact/NOTES/ran7/an2017-7.pdf
This information is distributed for education purposes, and it is not to be construed as an offer, solicitation, recommendation, or endorsement of any particular security, product, or service.
Photo: Pexels.com
(c) Scott Burns, 2018