A worker with a family is presumed to have greater need for income
replacement in case of retirement, death or disability than is a worker
without a family. Also workers with relatively high earnings are presumed
to be in a better position to help provide for their own financial risks
than are workers with low earnings.
Thus, Social Security provides relatively higher benefits, as a percentage
of a worker's pre-retirement earnings, to those with low earnings. And
workers with families get benefits for their dependents.
Individual equity means a worker's benefit amount is related to his or her
earnings. Other things being equal, workers with higher earnings will receive
higher benefit amounts, although the amounts they get will replace a smaller
portion of earnings than benefits paid to low-income workers.
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For example, an individual who retires this year at age 65 after paying
the maximum SS payroll tax will get his or her money back in 10.5 years,
if only the retiree's payroll taxes are counted. But it will take 25.6
years if the employer's taxes are also considered. (If the retiree is
married to a non-contributing spouse, the couple will get their money back
in 15 years.)
Moderate earners will do much better. A person retiring this year with
average earnings, he or she will get money back in 7.9 years, if only the
retiree's taxes are counted, and 18.5 years if both employer and employee
taxes are considered. (It will take just 11 years, however, if the retiree
has a noncontributing spouse.) These rates of return aren't unreasonable
when life expectancy is taken into account. The average remaining lifetime
is expected to be 15.3 years for males retiring at 65, and 19.1 years for
females.
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Moderate-income workers will do better. A single worker with average earnings
retiring at 66 in 2015 will need 29 years to get back combined
employee-employer taxes, while a couple with a noncontributing spouse retiring
with average earnings will require 17.1 years.
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Some Social Security Questions:
What does "social adequacy and individual equity"
mean?
Does Supplementary Security Income (SSI) drain Social
Security Funds?
Is a worker better off investing with the private
sector?
Will people that are scheduled to retire this year get
their money back from Social Security?
Will people retiring after 2012 get their money back
from Social Security?
Meaning of Social Adequacy and Individual Equity
Social Security doesn't work like an annuity. Annuities are structured
to make payments based strictly on what you paid in. Unlike annuities,
Social Security is social insurance. Benefits are based on both "social
adequacy" and "individual equity." Social adequacy means that benefits
provide at least a minimum "floor of protection" for workers.
SSI Impact On Social Security Funds
The Social Security Administration administers the SSI program. But no
Social Security funds are used to finance SSI benefits. SSI is a means
tested income-support program for low-income individuals and is financed
out of general revenue funds.
Social Security Better Than Private Sector
Investing
Persons with low earnings records, who every year invested an amount equal to their SS payroll taxes, and their employer's matching SS taxes, would be hard pressed to find any form of investment that could earn more than they would be
entitled to get under Social Security. To begin with, there's the question
of what would happen if they guessed wrong about where to invest. But the
biggest reason Social Security is a better deal for virtually everyone is
that besides a pension the employee and his dependents are covered by Old
Age Surivivors and Disability Insurance benefits. These insurance benefits
are increased annually to hold their purchasing power as prices rise. Few
private investment plans provide such an inflation guarantee.
Payback for Current
Retirees
Although soon-to-be-retirees who paid the maximum payroll tax over their
careers may find themselves roughly breaking even, the majority of retirees
are coming out comfortably ahead. Low-income earners will continue to do so,
while some average-and high-income earners will see an erosion in what their
money is worth, by the middle of the next century, where they may not break
even. However most higher income earners have savings and other investments
in addition their Social Security benefit income.
Payback for 2012 Retirees
Unquestionably, people retiring after 2012 will realize smaller returns than
today's retirees, a development that's inevitable with the maturing of the
system. Unmarried, maximum earners may actually get a negative return on
their contributions. For example, a maximum-earning, single worker retiring at
66 in 2015 will need 47.1 years to get back his and his employer's taxes
(compared to 25.3 years for a married retiree with a noncontributing spouse).
Questions or comments about Social Security can be directed to:
psu01435@pdx.edu