The Social Security Administration has been in place for a very long time now, and most Americans have been living under the assumption that a retirement benefit awaits them when they reach the appropriate age. But during the last decade, we have heard some people in our government warn that this administration could run out of money in the next 10 years. Also, there are a few of these politicians who claim the whole system should be dissolved.
I decided to take a close look at what happens with our Social Security contributions over time. Clearly, contributions will vary significantly from one taxpayer to another, depending on income. A typical example would be a person who started working in 1979 at age 20 and plans to retire in 2026. Assume that this worker earned $10,000 in 1979 and that earnings grew at roughly 4% per year to about $60,000 in 2026. Each pay period, this employee would pay in 6.2% of their income, and the employer would do the same. We do not know exactly what happens to that money, but it would be nice if all of it were invested and earned at least 4% per year. As these earnings increase the total contributions, the ‘nest egg’ would reach a value of about $350,000 – if it were done this way. But it is not.
The reality is this: As the money comes in, almost all of it goes right back out to pay existing retirees. When there is a surplus, it is typically used to buy Treasury Bonds or similar. Once that is done, the government can do anything with it – like send a vehicle to Mars.
Our hypothetical taxpayer will probably see a ‘benefit’ of $1,600 to $1,800 per month. If the contributions could go into an account in the taxpayer’s name, that person could withdraw more than the $1,600 to $1,800 per month and still maintain the principal.
If a taxpayer does not survive long enough to collect any benefits, all that money paid in is absorbed by the government – unless there is a spouse or children to receive some benefit.
In spite of this, it seems that we do not have a very large amount of money built up in this system. Why is not clear. But if the income is being paid out as soon as it comes in, then there is reason to fear that the Social Security Administration could actually run out of
money and shut down within the next decade.
The other troubling thing about this system and associated rules is that many taxpayers are paying income tax on their ‘benefit’ dollars. Depending on the amount of other incomes, as much as 85% of a Social Security benefit can move over into the taxable column. The employee contributions (the 6.2%) had already been taxed once. And most
would agree that this cannot be called “earned income.”
Many feel that the system is not designed to be as effective as it could be. But our government seems to have so many other priorities that our chances look very slim right now.
Many feel that the system is not designed to be as effective as it could be. But our government seems to have so many other priorities that our chances of reworking the system to be more effective look very slim right now. Social Security benefits are
your money, for as long as the funds exist. Let’s hope someone takes a hard look at what needs to happen to keep it healthy for future generations.
Larry Schwartz of PHP Tax Services is an IRS-certified tax preparer and provides free tax help to those with a household income under $65,000.