Had You Maxed Out Social Security Over the Last 30 Years…

I like looking at numbers. I like taking situations and looking at them differently. One of the areas I have been thinking about lately is social security. A lot of us just dismiss social security as something that we pay into over a career and then the government will pay us back when we retire. This little exercise is an excerise in “what if…” analysis.

Imagine had you began a 30-year career in 1980, making $25,900 (the maximum amount of income subject to social security withholding). Imagine over your career you were always subject to maximum withholding. How much would you have paid into social security over those 30 years? Well, the graphic below will show you:

The wages subject to social security withholding rose 4.84% per year (geometric average) while the maximum amount paid in rose 5.53% per year (due to the increase in the withholding percentage). Over a 30-year career, you would have paid in over $115,000 and your employer would have paid in another $115,000. Your total contributions would have been over $230,000.

Of course this only tells part of the story because had you not paid social security, the money could have been invested elsewhere. Over the last thirty years (through 2009), the total return for the S&P 500 Index has been over 11.24% per year (.89% per month). If we assume fees of .50% per year, that brings the average annual total return down to 10.69% per year (.85% per month)*. Based on that, the account could have been worth over $739,000 at the end of 2009 (including the employer match). At a 4% withdrawal rate, the account would kick off nearly $30,000 in income the first year ($2,500 per month). Keep in mind that this is only for one person. Had your spouse also worked, the “account” would be much larger. According to the Social Security website, the maximum benefit in 2010 is $2,346 per month (at age 66).

I understand that social security is just that…SOCIAL SECURITY. Meaning, it’s supposed to fund a minimum retirement for people and is not actual accounts for those who make annual contributions (though the social security statement you receive makes it seem like you do have an account). This program could have been so much better had they stuck with a bare bones plan that took care of the indigent instead of everyone.

*My numbers may not appear to match up properly. The difference is due to rounding and the compounding of fees.

13 thoughts on “Had You Maxed Out Social Security Over the Last 30 Years…”

  1. Will Social Security pay the maximum benefit to this hypothetical worker? If so, it appears that a pension of $2346 per month guaranteed by the government should be compared to $2500 per month that could be provided by withdrawing 4%.

    Should we conclude that Social Security is a good deal for the highest-paid? (Stable, government guarantee, risk-free return.)

    Two questions spring to mind:
    1. How large an annuity could I purchase for $739,000?
    2. How does this look for lower-paid workers?

  2. Every penny of the money he contributed in 1980 was spent (by the government) in 1980 — most was used for retirees collecting SS benefits in 1980, and the rest for other government stuff/spending in 1980.

    Likewise, the same for 1981, etc.

    So this boils down to: had the government not spent $x in the past, it would’ve been worth $y today if invested in the S&P 500.

    Had I not bought a coffee every day for the past 30-years, I’d have $15,000 today (wild guess) — but at the same time, I wouldn’t of had my coffee every day either…

    Social Security, like all other spending programs in the government or on our personal budgets, need to be judged on whether:

    is it a ‘need’ or a ‘want’?
    is it worth the cost, am I getting a good value?

  3. Anyone paying the maximum every year to Social Security receives the least benefit for the money taken compared to those who earn and pay in less.

    Social Security acts as a hidden and massively progressive income tax. From a Scott Burns article in late 2008:

    Those with average monthly wages below $711 this year, for instance, are credited with 90 percent of those wages for (Social Security) benefit calculations. If your monthly wages are over $4,288, however, the crediting rate is only 15 percent. The difference amounts to a very steep, but hidden, progressive “tax” on benefit eligibility.

    Social Security is not just tilted toward the older at the expense of the younger, but also tilted toward those who earn less at the expense of those who earn more.

  4. Also, the unofficial idea behind the employer/employee tax was that the employee tax would fund the employee’s benefit while the employer tax would be redistributed to help fund the benefits for lower paid employees. So, for those with higher pay, they would see only a part of the employer tax back.

    What is the analysis if you only look at 1/2 tax, how many years would the fund pay out the $2,300 benefit (with inflation)?

  5. somehow i doubt that companies would pay the match to employees if SS didn’t exist.

    (case in point: IRS just handed down a decision that medical residents are not subject to FICA and they will likely be handing back FICA amounts payed over the last 5 years to the payers. Employees will be getting back what they payed and employers will be getting back what they payed. Going forward, since the cost per resident is going down, are employers planning on raising resident wages by anything near the FICA match? Highly doubtful)

    So i think the 760,000 is a very high estimate.

    I’d say the outcome is not bad for the retiree though, they invested in a risk-free (It was then, maybe it isn’t now) retirement plan and now get within 10% of what they would have gotten if they invested in the much riskier market.

  6. Had the S&P 500 not returned 11% per year then the returns would have been a whole lot less and the SS payout suddenly becomes much more attractive. You’re also assuming that people would remain 100% invested in stocks over 30 years which is certainly not a reasonable real world assumption.

  7. The S&P 500 wouldn’t have given that high of a return if you look at annual year to year performance of the index. The actual ups and downs compound worse than the average % difference. If you’d bought shares of the S&P 500 once a year you’d end up with more like $570k.

    At 4% you’d get just $22,800 a year from the $570k nest egg. Social security benefits would be around $25,000 a year with cost of living adjustments. THrow in spouse benefits at 50% and you’re at $37,500. You could instead buy an annuity from the $570k which would get you about $45,000 a year but with no inflation increases.

    Laurence, re: “somehow i doubt that companies would pay the match to employees if SS didn’t exist.”

    I’m pretty sure he meant to include the amount that an employer pays to social security. i.e. I pay $2000 to SS and my employer pays $2000 so he’s looking at putting $4000 into the S&P 500 for comparison sake.

  8. Jim,

    Why would you assume that you invest once per year? Most people get paid at least monthly. That’s why I used a monthly figure. So, over that last 30 years through 2009, that’s exactly what you could have expected give or take a expenses. But, that’s in the past. What the future holds is anybody’s guess.

    And, given the fact that a person could have done better with Social Security only proves it’s a sham.

  9. Sorry I think I did the numbers wrong somehow when I came up with that $570k figure. So I am not going to doubt your $739k figure.

    “given the fact that a person could have done better with Social Security only proves it’s a sham”

    I don’t follow your conclusion there that its a “sham”.

    Low income people get higher rate of return on SS tax than higher income people. The retirement benefits as % of income are progressive by design.
    Someone who makes $15k can see about 60% of their income in SS retirement while someone who makes $105k will get more like 25%.

  10. Let’s not forget, Social Security is a ‘common good’ type system. None of us can predict the future and don’t know if we will continue to make more and more money each year or if tomorrow we find ourselves broke and on the street. If left to our own needs, might be forced to use our private SS funds for emergencies that come up in life (such as a prolonged illness). In addition, many people do not have jobs by choice or necessity, stay at home moms for example, they are dependent on their spouse for monetary support. we all know women who have been left destitute because of the actions of their spouse. Having SS as a safety net certainly helps.

    One suggestion that might help is to have the taking of SS benefits a choice. If you don’t need it, decline to take it but with the options that if your situation changes you can go back into the system. Seems this would appeal to those who think it is a moral and religious imperative to help those that are less well off than ourselves

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