Saturday, December 29, 2012

Social Security a Federal Benefit?

There has been an email floating around urging the recipients to forward it to their friends, disputing that Social Security is a "Federal Benefit Payment", see below.

While it's probably politically incorrect to disagree with that allegation since most people do believe they are just receiving what they have already paid into the system when they retire, unfortunately, that is simply not true.

Today, most new Social Security recipients receive their full benefit when they reach age 66.  The average life expectancy in the U.S. today is 78.5 (see  So on average, a recipient receives 12.5 years of full benefit.

Let's just accept, for now, the example given in the email, an average worker making 30K a year over a 40 year working life would have paid in $180,000 between his own contribution and his employer's matching contribution.  Amortize that $180,000, earning 3%, over 12.5 years, the monthly payment is 1,440.51, not the $3,277 amount claimed by the email.

And $375 per month for 480 months at 1% per annum (0.0833333 per month) would yield $221,209.30, not the $1.3 million figure the email alleges.

On top of that, there are several other errors in the assumptions made by email.

Social Security is calculated based on the highest 35 years of indexed earnings (  There is a maximum amount of wages subject to Social Security called the wage ceiling.  The wage ceiling did not reach $35,000 until 1983, or 30 years ago. Additionally, the email assumes a combined social security tax rate of 15% for all those years.  The fact is the Social Security tax rate is much lower than that during the last 35 years.  Other than 2011 and 2012 where workers enjoyed a 2% Social Security tax holiday, the maximum tax rate since 1990 for employee has been 6.2%.  So even if one includes the employer matching contribution, the tax rate was no more than 12.4%.  The combined tax rate 35 years ago in 1978 was 7.1%, with the employee paying 3.55% and the employer paying 3.55% (  So the $180,000 amount is way over-stated.

On top of that, to include the employer matching fund in the calculation is questionable.  Without a federal mandate, I am not aware of any employer who is that generous, matching employee's contribution dollar for dollar.  Even if one considers the employee has earned that matching contribution, the employee has not paid any income tax on that matching contribution.  Besides, most people I know live well beyond age 78.5.

Social Security is also skewed toward low income taxpayers.  Basically, it's a set of calculations that helps level the playing field between lower wage earners and higher wage earners. For instance, low wage earners who retired at age 66 will receive benefits of about 56 percent of their pre-retirement income; for medium wage earners, the figure is about 34 percent; and for high wage earners, it is just over 15%.  Let's take a look at an example:

For a worker with average indexed monthly earnings (AIME) of $3,585 retiring in 2013, he would receive $1,605.90 per month, calculated as follows: 90% of $791 + 32% of ($3585 - $791), rounding the result down to the nearest dime.

For those with AIME over $4,768, they only receive 15% of the excess.  See

There is also a "special minimum" benefit for certain individuals who've had long periods of relatively low earnings.

There are additional Social Security benefits.  For example, a worker whose spouse does not work outside the home or works very little outside the home, his/her spouse is entitled to 50% of the worker's monthly benefit amount.  And when a worker dies, his/her surviving spouse may be able to take over the decedent's Social Security benefits.  There are also benefits for an eligible divorced spouse.  A child under age 18 is entitled to collect Social Security if the worker becomes disabled.  And of course, there is a Social Security Disability Benefit for the worker as well.

And now, there have been rumors that future Social Security may be based on needs, i.e., means testing.

So my conclusion is that Social Security is a Federal Benefit Program, even though we contribute into it while we work.  The benefits for most people are far greater than what they have contributed.  Lastly, Social Security has always been labeled a "Federal Benefit Payment", this is not new.

Here is the email:


Have you noticed, your Social Security check is now referred to as a "Federal Benefit Payment"?

I'll be part of the one percent to forward this. I am forwarding it because it touches a nerve in me, and I hope it will in you. Please keep passing it on until everyone in our country has read it.

The government is now referring to our Social Security checks as a Federal Benefit Payment. This isn't a benefit, its earned income! Not only did we all contribute to Social Security but our employers did too.

It totaled 15% of our income before taxes. If you averaged $30K per year over your working life, that's close to $180,000 invested in Social Security. If you calculate the future value of your monthly investment in social security ($375/month, including both your and your employer's contributions) at a meager 1% interest rate compounded monthly, after 40 years of working you'd have more than $1.3+ million dollars saved!
This is your personal investment.

Upon retirement, if you took out only 3% per year, you'd receive $39,318 per year, or $3,277 per month. That's almost three times more than today's average Social Security benefit of $1,230 per month, according to the Social Security Administration (Google it - it's a fact).

And your retirement fund would last more than 33 years (until you're 98 if you retire at age 65)! I can only imagine how much better most average-income people could live in retirement if our government had just invested our money in low-risk interest-earning accounts.

Instead, the folks in Washington pulled off a bigger Ponzi scheme than Bernie Madoff ever did. They took our money and used it elsewhere. They "forgot" that it was OUR money they were taking. They didn't have a referendum to ask us if we wanted to lend the money to them.

And they didn't pay interest on the debt they assumed. And recently, they've told us that the money won?t support us for very much longer. But is it our fault they misused our investments?

And now, to add insult to injury, they're calling it a "benefit," as if we never worked to earn every penny of it. Just because they "borrowed" the money, doesn't mean that our investments were a charity!  Let's take a stand.

We have earned our right to Social Security and Medicare. Demand that our legislators bring some sense into our government.  Find a way to keep Social Security and Medicare going, for the sake of that 92% of our population who need it.

Then call it what it is: Our Earned Retirement Income.

99% of people won't forward this.
Will you?