Payback from Social Security

Social Security does not work like an annuity. In an annuity payback is based strictly on what a person pays into the annuity. Unlike annuities, Social Security payback is based on both what a person pays into the Social Security (OASDI) Trust Fund and "social adequacy and individual equity". It also provides insurance benefits (SSI) for survivors of workers who have died, dependent children, and disabled workers.

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.

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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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.

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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.

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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.

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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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).

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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