Because Social Security taxes are a payroll tax based on our earnings many people see this tax differently from other taxes. It is even perceived by many Americans that they are contributing to an account identified for their benefit.
The following is a common attitude:
“These are not payments, but ‘repayments’ of money that we have been forced to hand over to the government to fund a Ponzi scheme during our working lives. It is not expenditures on the elderly — it is a partial refund of money we have been forced to hand over.”
In fact, this tax is no different than the income tax withholding taken from our pay.
There is no relationship between the taxes you pay and the benefits you may receive. The benefits are governed by law and the law can be changed (and has been) many times. For example, it was recently proposed to increase a factor (bend point) in the formula to increase benefits for lower income Americans.
There are many situations where the Social Security benefit varies greatly from that which could be supported by the taxes an individual paid. For example:
🤫 A worker marries a year before retirement and the family benefit jumps by 50%
🤫 A worker is married ten years or more gets divorced and remarries; two spouses then collect a spouses benefit.
🤫 A worker becomes disabled early in life or dies and family benefits are paid.
🤑 COLAs are paid throughout retirement.
🤑 The benefit formula is intentionally skewed to provide a higher proportional benefit to lower income workers.
Even more telling is the fact that Social Security is not sustained by payroll taxes. First, overall funding is inadequate. The system at current benefit levels cannot be sustained without changes. In addition, benefits can only be paid today using interest on the trust fund bond holdings. Income taxes paid by some individuals on 50% of their benefit are also used by Social Security.
In 2020 the Trustees anticipate starting to redeem the bonds held in the trust.
Think of Social Security like health insurance and Medicare. A group of people pay into a pool; some collect a lot in return, others little or nothing, but in no case is the return related to the premiums (taxes) paid. Of course, with health insurance we hope to collect nothing in return.
Many people hold the view that paying Social Security taxes is a bad deal, that they could invest the money over their working years for a better return. In theory that could be true if everything worked out perfectly over one’s lifetime. However, that logic reinforces the false notion that we pay Social Security taxes only for our benefit in retirement.
To receive the average Social Security benefit today (about $1,300 a month) you would need an income in 2019 of $50,000 before retirement according to the SSA Quick Calculator. To buy a joint and survivor annuity providing that monthly benefit you would need $226,126 according to the Schwab annuity calculator.
Could a person earning $50,000 only at the end of a working career at age 66 accumulate that sum guaranteed? Maybe, maybe not and that’s the difference, the maybe not part. Then there is the second issue. Could that person manage their accumulated retirement fund the generate the monthly income for life … and we haven’t even considered survivor benefits.