Good Article on Social Security

I’m busy today but I wanted to share this article that I found in the June issue of Financial Planning with you. It’s titled The Greatest Benefit and it is about how planners can help people understand and plan for Social Security benefits. It’s a very complex issue (much more complex than it should be) since the benefit amounts are based on several factors:

  • The income you received during your lifetime and the social security taxes you paid in.
  • The age at which you begin taking benefits. The longer you put it off, the bigger your benefit is up to a point.
  • Your marital status at the time you take benefits. Do you want your spouse included in your benefits or do they want to take their own benefit?
  • Whether or not you work during retirement. If you work and make too much money, you’ll have to give up some of your social security benefits.
  • Taxation of benefits. If you have too much income from other sources during retirement, some of your social security benefits will become taxable.

So there’s a lot to consider. The article does a decent job of explaining some of these decisions from a planner’s point of view.

Personally, I don’t like social security. When I look at the amount of money that my wife and I are paying in, we could EASILY have an additional $1 to $2 million at age 70 if we were allowed to invest the money on our own (and that’s not including the employer’s portion of the contribution). Something tells me that we’ll never see benefits that good. The government is a poor money-manager.

20 thoughts on “Good Article on Social Security”

  1. I agree that I would rather fund my own retirement instead of paying social security, but what can we do about it now? We’re kind of stuck, if we don’t continue to pay the citizens now retired will lose their income.

  2. Chris,

    There’s no doubt that right now we’re basically screwed. It would have been nice if our politicians could have figured this one out in advance. They really let us down.

  3. ps, did I miss the part about social security becoming taxable income? I found this formula on the social security website.

    Your adjusted gross income
    + Nontaxable interest
    + ½ of your Social Security benefits
    = Your “combined income”

  4. Social Security serves as a backstop, a source of income as a last resort for people that couldn’t or didn’t save for their retirement. It is basically a modified form of welfare and income redistribution since the benefits you get are not tied very closely to the amount you contribute. It provides a basic income for pretty much everyone.

    I see it as a necessary evil, since a portion of the population will not save for themselves. And another portion will encounter circumstances (death, divorce, illness) that make it necessary.

    You are correct that someone that invested a similar amount would get a lot better return from that investment than they will from Social Security. But you could say the same about a lot of things the government takes your money for. In any event, I don’t think Social Security is going away in my lifetime.

  5. couldn’t disagree with you more. social security is INSURANCE. As you know, insurance is a negative net present value proposition. That said, social security is a (practically) guaranteed return, so even if you think you could do better in the market, you might not. There are people in this country who are unable to save enough for retirement due to high medical bills, low wages, etc. Social Security is meant to take care of them in their old age and it has consequently been extremely successful…Poverty among the elderly has decreased dramatically since SS was initiated.

    I will happily buy insurance so that I may have a minimum income in my old age, as well I will happily give so that the old and infirm arent forced into eating cat food to survive.

  6. I’ve no problem with the idea of Social Security as a welfare program for poorer retirees who weren’t able to save enough for retirement. I actually think the program isn’t generous enough for those individuals, and wouldn’t mind seeing payments expanded.

    I have a major problem with Soc Sec as it is currently formulated, with the majority of the benefits going to people like me – relatively high earners who will spend 20+ years over the cap, collecting the bulk of the benefits. It’s bad for the low earners (who will get less benefits despite contributing a higher percentage of their income), it’s bad for the high earners (who would rather have stuck their payroll taxes in a total market index fund), and it’s really, really really bad for young workers, whose contributions will be far, far in excess of their likely future benefits.

    What I’d like to see is Soc. Sec gradually phased out for current workers. Anyone over 45 should get full benefits – it’s not their fault the system is the way it is, and it’s too late to expect them to change their plans. There should be a 5% reduction in benefits for each year between 36 and 45 (so a 41 year-old worker gets a 20% reduction in benefits), and 10% reduction for each year between 31 and 35 (so it’s 90% reduction for a 31 year-old, and no benefits for a 30 year-old such as myself). FICA contributions are also scaled down to 1/2 the reduction of benefits (so I still pay FICA at 50% of current FICA rates, and the 41 year-old gets a 10% reduction in rates). This is admittedly unfair to folks like me, who have to pay into a system that they won’t get benefits from, but I pretty much already assume that I’m already paying into a system from which I’ll never collect benefits. My plan just admits this up front and reduces my liability, without cutting off benefits for current retirees or older workers.

  7. Oops, I forgot the second half of the plan – which involves means-testing benefits for workers currently between 31-45 years of age, indexing retirement age to productive life expectancy, capping benefits for high net-worth individuals, setting a higher minimum payment for low net-worth individuals, and a whole bunch of other stuff which has 0% chance of ever happening.

  8. Muntz,

    I’ll agree with you that social security SHOULD be insurance. However, it is awfully expensive insurance, especially for those who contribute the maximum amount.

  9. nah – it really isn’t…..also, please stop thinking of it as an investment program – it isn’t. it is PAY AS YOU GO. Current workers are paying in to cover current retirees, plus a little bit more to cover actuarial predictions. it. is. not. an investment. the government is not investing your money.

    Not sure why you think it is so expensive. The max one could pay is $7206 for 2006. And that is only if your taxable earnings are $94200. If you make $500,000, you still only pay $7206. At 7.65% don’t view single digit tax rates as that onerous….what offends me is that SS tax is capped and therefore regressive.

  10. Muntz,

    I’m not thinking of SS as an investment program. What I am thinking about is what I could do with that money if I could invest it.

    Yes, it is a pay-as-you-go system that isn’t fair to those who must support larger segments of the population. My generation (I’m 37) will NEVER receive benefits equal to what we pay in.

    Oh, and the actual percentage that goes to SS is 6.2%, not 7.65%. The 1.45% difference is Medicare and it stays the same no matter how much you make. So, in actuality, if you made $500,000, you would pay $6,045 (6.2% of $97,500) + $7,250 (1.45% of $500,000) for a total of $13,295.

  11. Personally, I count the “employer’s share” since it’s part of your payroll allocation. So, the SS contribution is more like 12.4%, although you don’t see half of it on your check unless you’re self-employed, in which case you see the whole thing.

  12. Don’t think of it was an investment or insurance or welfare. It simply is a necessary tax — money spent to avoid a revolution where the non-saver majority take your assets by force. Remember the historic backdrop to Social Security. Other nations responded to the economic conditions of the early 20th century with communist and fascist dictatorships. Don’t be naive and believe it would have never happen here due to our traditions and beliefs. All that go out the window when consumers can’t delude themselves with spending.

  13. I think Independent George is wrong concerning the distribution of benefits. The formula by which the benefit payment amount is calculated is heavily weighted to lower income wage earners. According to, the formula is:
    For an individual who first becomes eligible for old-age insurance benefits or disability insurance benefits in 2007, or who dies in 2007 before becoming eligible for benefits, his/her primary insurance amount will be the sum of:

    (a) 90 percent of the first $680 of his/her average indexed monthly earnings, plus
    (b) 32 percent of his/her average indexed monthly earnings over $680 and through $4,100, plus
    (c) 15 percent of his/her average indexed monthly earnings over $4,100 and not exceeding $8,125.

    If my calculations are correct, someone with an annual income of $20,000 whose income has just kept up with inflation for the past 35 years, would receive benefits of $16,097, which would replace 80% of his or her income. Someone who has earned at or above the maximum covered earnings ($97,500 this year) would receive a maximum benefit of $27,722. Here is a table of replacement rates:
    $20,000 –> 56%
    $40,000 –> 44%
    $60,000 –> 37%
    $80,000 –> 31%
    $100,000 –> 28%
    $150,000 –> 18%
    $200,000 –> 14%
    $300,000 –> 9%

  14. I hit the submit button before I was completely through with the above comment. Here is the rest of what I wanted to say:

    Furthermore, after wading around though the statistics on and setting up a spreadsheet, it appears that over 75% of old age benefits go to people whose average indexed earnings were less than $35,000 per year.

  15. my wife and i are in our 50’s. my approach to ss is to not even think about it. whatever we get is a perk or bonus. and, when i do think about where it might fit in, if and when it’s there, i’ll pay health insurance with it. thinking of it any more than that is unproductive and a waste of time.

  16. Great discussion everyone. It’s true that over 40% of those currently collecting Social Security retirement benefits depend on SS to provide 100% of their monthly income, but the system itself is responsible for some of this dependency. Payroll taxes hit low-wage workers the hardest. If these folks had the ability (after paying for housing, groceries, childcare, gasoline, etc.) to save some portion of their income for retirement many of them would. But payroll taxes currently take one dollar of every eight today’s workers earn to pay benefits to today’s retirees. When the baby boomers start retiring (and the first ones will be eligible for early retirement in January 2008), we’ll eventually have to increase payroll taxes (thereby taking more from low-income workers) or reduce benefits (thereby increasing dependency of retirees). Is Social Security a Ponzi Scheme? You decide ( Whether it is or isn’t, the system is broken and must be fixed.

  17. to rubysdad: you said when the baby boomers retire we’ll have to increase taxes or decrease benefits. simply untrue. The earliest baby boomers will start hitting 65 in the next few yrs. However, according to the social security administration’s own (nonpartisan) estimates the system, according to conservative estimates is more than solvent through 2043. And even with these CONSERVATIVE estimates it will still be able to pay more than 70% of benefits. Note: if you go back to look at what the conservative estimates have predicted, we’ve always been more solvent than these estimates have predicted with even slightly less conservative estimates social security is sovlent well into the 22nd century.

    Is the system responsible for “dependency?” I don’t know and neither do you. That is an opinion. What is indisputable are the numbers.

  18. It’s only “solvent” because the mythical “social security surplus” is a big pile of government bonds. These bonds will start to be paid out of current revenue starting in around 2015 or so. These bonds will take an increasing share of revenue during this time, and allow a decreasing share for other government purposes.

    Until then, the “budget deficit” is lowered because the “Social Security surplus” decreases the amount that needs to raised from external sources since the government is selling bonds to itself.

    There is no government “account” with a real “social security surplus” that could be used to fund retirements. It’s just a bunch of IOUs against future tax revenues.

  19. I am happy that everyone pays SS taxes. I think it is appalling that not everyone pays taxes- everyone receives benefits! The bleeding hearts who think that I should bear any burden to support the non-productive of the world don’t sway me.

    I do think that the total amount paid should be transparent (i.e the employer paid portion). If that were true, there might be a bigger drive from the public for reforming the Ponzi scheme that it is.

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