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Social Security benefits vs. taxes

By Barbara Whelehan ·
Friday, January 7, 2011
Posted: 3 pm ET

Retirement planning involves sacrificing a portion of what we earn today and investing that money in the hope that one day we'll have enough assets from which we can draw an income. But the Social Security and Medicare systems operate differently, taking a portion of earnings from today's workers to pay for the needs of today's retirees.

Just how much do we pay out in Social Security and Medicare taxes over a lifetime, compared to how much we receive in benefits? The answer depends on several variables, including gender, earnings, household configuration, the age at which we retire and our health. But generally, we receive far more in benefits than we pay into the system, according to new figures released by the Urban Institute.

The nonpartisan think tank released tables showing how much the average person receives in lifetime benefits versus how much he or she pays in taxes, assuming average life spans and a 2 percent real interest rate (meaning 2 percent above the inflation rate). A Q&A with Institute Fellow C. Eugene Steuerle, one of the authors of the study, explains the assumptions used in the calculations.

The upshot

No matter how much you pay into the system, whether you earn the average wage over a lifetime ($43,100 in 2010 dollars) or if you're in a two-income household where one earns a high wage and the other earns an average wage, you get back substantially more than you pay in. But those on the high end of the wage scale pay proportionally more in taxes than the average wage earner, not surprisingly.

Example: A male average earner who retired at age 65 in 2010 paid out $345,000 in total Social Security and Medicare taxes, but will receive $417,000 in total lifetime benefits ($464,000 for a woman).

A much bigger disparity in taxes versus benefits occurs for couples. In the case of a household with only one wage earner, the taxes paid out were $345,000, but the benefits received by both parties will be $778,000. For two-earner couples where one earned the average wage and the other earned a low wage ($19,400), tax payout was $500,000, but benefits will be $800,000.

Those who retired in decades past saw much bigger returns for their payroll tax investment.

But clearly this situation is not sustainable. It's like putting all your expenses on a credit card knowing full well you don't have the means to pay it back. Social Security is still fixable, but Medicare is a much bigger problem.

"What we're trying to point out through these numbers is that relying on deficits and income tax revenues to make up the gap in Medicare funding means cutting other things that government does or leaving heavy burdens for future generations to pay," says Steuerle. "We're all responsible for dealing with our large future projected deficits both as a whole and within our social welfare systems; we're not 'entitled' by any reasonable calculation to leave the costs of fixing them to younger generations."

It's really not fair to saddle young folks with these costs at the expense of economic growth, and the sooner our political leaders address this problem, the better for everyone.

But in an illogical move, the leadership in December cut payroll taxes by 2 percent through 2011.

We can fritter away this "found money" or do something smart with it, like increase our retirement plan contributions by at least that amount. If our leaders don't behave responsibly, it behooves us to do so.

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January 21, 2011 at 7:17 pm

First of all let me tell you that FICA is not a tax! Every cent that I earned was a basis for a FICA payment to the government is taxable income as I receive it back. Just try to claim what you paid in as a tax deduction when it is finally returned to you. That wont fly as SS in the governments words is an entitlement and thus subject to being taxed as income. To all of those who think that I will receive more in benefits than I paid in, well try again using real economics instead of an Ouija board. If every year I had put that money into a savings plan or similar, I would be "rich" today even with the market downturn. I did save money out of every paycheck for 40 years knowing full well that SS would be broke long before I reached retirement age. Well, it is broke as the government couldn't keep their hands off of it.

January 16, 2011 at 3:11 pm

The actuaries in 1935 told the FDR administration that Social Security would be insolvent by 1980. The supposed fix in 1983 was a total and complete fraud because the so called Trust Fund is an oxymoron if ever there was. It holds nothing but government IOUs, and its only purpose is to obfuscate the debate.

January 12, 2011 at 3:22 pm

As a 25 year old professional I know that I will not get any money back from Social Security. It is not a feasible system and all it does is rob me of my money and give it to old people who did not plan how to use theirs.

Barbara Whelehan
January 12, 2011 at 2:46 pm

Francis, I hear ya. Right now if we buy a mutual fund and discover it's mismanaged or too expensive, we can vote with our feet. But unfortunately, in the political sphere, voting for different candidates doesn't seem to make an impact on the way our taxes are managed (or mismanaged). And the problem is not confined to a particular political party.

Francis Woods
January 12, 2011 at 1:24 pm

How much of the shortfall has been caused by past Congress' and Presidents using Social Security as their ready supply of money.

And giving ever increasing benefits as bribes for votes.

It's hard to imagine what would have been the state of SS if left alone and smartly invested and kept to its original payout schedule.

January 12, 2011 at 9:22 am

@ Joseph B Waverman, your figures are incorrect. Social Security does impose an "annual earnings test" for individuals receiving social security benefits while under their full retirment age (for most people that is 66 years old). But, the annual earnings test only applies to WAGES, not pensions or anything else, and the social security benefits themselves are NOT included in the computation. For those earning over $14,160 in wages, their Social Security benefits may be withheld $1 for every $2 over the limit.

January 11, 2011 at 3:26 pm

Prior to 1983, Social Security was a pay as you go system, where FICA taxes from the younger generation paid for the benefits of their parents. But as a result of the 1983 reforms under Reagan, (which involved both an increase in the retirement age and a large Social Security tax increase), the baby boomers became the first generation to pay for their parents' social security benefits while providing for a large part of their own. - But for this plan to work, congress would have had to have been responsible. The surplus should have been used to pay down the national debt- Instead we have had an orgy of income tax cutting which has primarily benefited the rich - Now it is time to roll back those income tax cuts so that the trust fund can be paid back on schedule. - Social Security doesn't need reforming - but the rest of the government does. - Former President Bush called the Social Security trust fund a file cabinet of IOUs - but those IOUs have moral and legal value, because their source was FICA taxes on workers' wages that were justified only because they were to be used for benefits. Nobody has suggested that the government default on these IOUs - but watch out for "reform" plans that involve smoke and mirrors trickery to avoid paying them back. - For more information, go to and do a search for "Ronald Reagan on Social Security- Part 1" where you can see the speech president Reagan gave in 1983 when Social Security was fixed - and "Social Security in Ecolanguage" where you can see a quick explanation of the real problem.

Barbara Whelehan
January 08, 2011 at 9:43 am

Hi, Joseph. The payroll tax is pretty straightforward. Everyone pays (except this year, that is) 6.2 percent of their wages into the system up to a certain wage cap of around $106K, and employers match that amount for a total of 12.4 percent of wages. This year employees get a 2 percent "break" from the tax, a short-sighted attempt to stimulate the economy. I think you may be referring to taxation of Social Security after you begin receiving benefits between the window of age 62 to full retirement age if you also earn other income. The rules for that are pretty complicated. This blog post is about the payroll tax you pay into the system before you begin receiving benefits.

It's true that once you begin receiving Social Security benefits, they may be taxable. For more information about that, visit Bankrate's new Tax Guide.

An interesting side note: When coming up with the numbers for the study cited in this blog post, the authors assume that workers pay both the employee and employer portion of the tax. The rationale is that employers would otherwise pay more to their workers if they didn't contribute to the payroll tax.

January 07, 2011 at 7:46 pm

The poverty level in this country for a single person is about $13,500. For those who have income above that amount (from any source including social security) Social Security deducts one dollar of SS payment for each two dollars above $13,500. There is a means test, already. The more you make, the more is deducted from OASDI.

Jim Gries
January 07, 2011 at 4:52 pm

When Social Security reform legislation was signed in 1983, the contract between the people and their government changed forever. The plan that was suppose to fix the retirement program for 75 years, has practically destroyed the program in less s than 30 years. 78 million baby boomers are beginning to retire, the US economy is on life support, and Social Security is paying out more than it’s taking in; politicians have learned nothing.

Just as in 1983 they’re having the wrong conversation about Social Security. It shouldn’t be about raising the retirement age for current workers. or lowering retirement benefits on those who've already sacrificed once by overpaying their Social Security taxes. It should be about those who’ve reneged, and benefited from the political pilfering of the Social Security trust fund retirement dollars; 2.54 trillion dollars worth. Millions of middle class working Americans have made their investment, now It’s time for the other party to invest in them by restoring the Social Security trust fund retirement dollars; 2.54 trillion dollars. The people have kept their end of the deal, now it's time for politicians to “MAN UP by LIVING UP” and keep their end of the deal.

We’re drawing a line in the sand, not for the purpose of starting the negotiation, but for the purpose of letting politicians know where the people’s line is, and using Social Security to create another dollar of new debt on our children and grandchildren is crossing the line, and crossing the line will get you FIRED.