Retirement Blog

Finance Blogs » Retirement » Social Security benefits vs. taxes

Social Security benefits vs. taxes

By Barbara Whelehan · Bankrate.com
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.

«
»
Bankrate wants to hear from you and encourages comments. We ask that you stay on topic, respect other people's opinions, and avoid profanity, offensive statements, and illegal content. Please keep in mind that we reserve the right to (but are not obligated to) edit or delete your comments. Please avoid posting private or confidential information, and also keep in mind that anything you post may be disclosed, published, transmitted or reused.

By submitting a post, you agree to be bound by Bankrate's terms of use. Please refer to Bankrate's privacy policy for more information regarding Bankrate's privacy practices.
21 Comments
ConservativeCorporatism
March 05, 2011 at 10:01 am

Bernie Sanders , explains this well..and how social security has nothing to do with the deficit...look for it at rawstory.com, posted January 19, 2011.

stupid reporter
March 04, 2011 at 2:23 pm

This reporter is a financial illiterate. Do a net present value calc, or calc he future value invested elsewhere at a reasonable rate of 3 to 6%, and then tell me social (in)security has a good rate of return. Of course you should get more out than one pays in...its called time value of money, or compounding interest, duh. Get a freakin clue.

DOUG
February 21, 2011 at 9:42 am

INSTEAD OF GIVING THE MEMBERS OF THE HOUSE AND RAILROAD THERE OWN PRIVATE PENSION PLANS MAYBE THEY SHOULD BE FORCED TO PAY INTO THE SOCIAL SECURITY SYSTEM AND SEE HOW FAST THEY RESOLVE THIS PROBLEM ONCE AND FOR ALL

steve
February 20, 2011 at 8:19 am

melody - what is not used in any given year is/was put back into the general fund. no saving the x tra bucks for the future. so in good years washington just spent away. nice.

Melody Reed
February 19, 2011 at 2:07 pm

What this article doesn't discuss is how the money paid in by employees/employers is invested and by whom.

I've also been told that money from Social Security and Medicare has been used by government for other non-Social Security and Medicare causes. If this is true, then STOP stealing from these funds, get good money managers, and even with a modest return on investment our Social Security and Medicare systems would be fully funded and prospering.

I generally don't believe government statistics. They are very good at spinning results. The day Congress goes to, and relies on, Social Security and Medicare for their benefits, is the day all Americans will see record growth in these funds!

wtortorici
February 18, 2011 at 10:42 pm

Two things, no make that three things that will make and keep SS solvent.

First: Repeal any tax break for employers contribution.

Second: Lift the cap on contribution to SS and Medicare. I can hear the grumbling among the money changers now.

Third: Stop the Federal Reserve from bleeding the treasury by charging to distribute my money and giving member banks FREE money to back their loans so they'll start paying a reasonable interest rate on my savings. One bank declares, "Three times the average!" Well 3 X .10% = .30% Give Me A Break!

Ron Russel
February 15, 2011 at 1:49 am

My mother paid in Social Security all her life and never lived to collect a nickel. She wasn't even eligible for a burial benefit, since she had no spouse and no minor children. I'm in an income far above the 2010 average and have been for decades. Even knowing that, I wouldn't undo Social Security. Unlike Wall Street, I haven't taken losses in Social Security that weren't induced by some money changer.

Barbara Whelehan
February 10, 2011 at 3:08 pm

I asked Kay Bell, Bankrate's tax editor, if she has any ideas. Kay says only a portion of your Social Security is taxed. This story in Bankrate's Tax Guide discusses the work sheet to use to figure out how much of your income in addition to Social Security benefits is taxed, and how much money to withhold to prevent a big tax bill: http://www.bankrate.com/finance/money-guides/some-social-security-taxable.aspx

If you can put some money into a traditional IRA, that might get you a deduction....

STEPHANIE
February 10, 2011 at 2:09 pm

I WAITED UNTIL I WAS 66 TO DRAW MY FULL SSI $1020.00 A MONTH. NOW AS WE ALL KNOW YOU CAN'T LIVE ON THIS AMOUNT SO I AM STILL WORKING AND I DON'T HAVE ANY IDEA WHEN I CAN STOP. I WAS NEVER TOLD I WOULD HAVE TO PAY INCOME TAX ON MY SSI IF I MADE OVER $25.000.00 A YEAR. BUT I DID THIS YEAR. I CALLED IRS TO ASK WHY SINCE THEY TAKE OUT SSI TAXES ON EVERY PAY CHECK. I WAS TOLD THAT, YES THEY TAKE OUT TAX AND MY EMPLOYER MATCHES IT AND THEN AT THE END OF THE YEAR MY EMPLOYER TAKES THEIRS BACK AND USES IT AS A TAX SHELTER AND THERE IS NOT ENOUGH TO COVER MY TAXES ON SSI. THAT REALLY IS NOT A GOOD THING THEY NEED TO STOP ALL THE TAX SHELTERS FOR THE EMPLOYERS AND GIVE THE SENIORS SOME BREAKS AND IF THEY CAP AT AROUND $ 200.000.00 THAT MIGHT BE BETTER. I HAVE HAD TO TAKE OUT MORE IN MY CHECK TAXES NOW SINCE THEY ARE NOT TAKING OUT AS MUCH IN THE SSI THIS YEAR AND I ALREADY CLAIM ZERO. DO YOU HAVE ANY GOOD IDEAS? MY INCOME IS AROUND $34.000.00

scott wergin
January 21, 2011 at 9:42 pm

Never ending scare tactics and disinformation is what I hear coming out of Washington and New York, and the media. Somehow these leaders can never make it (retirement, jobs, salaries and wages, health insurance, vacation, spending money, college money) work for the 97% but the top can have never ending growth. It seems clear to me there is one hell of a lot of lies coming out of both sides of the isle, and certainly from the media. Social security hit something on the order of an all time high this summer of 2010 of what 2.5 trillion dollars gaining 3% interest. The Federal government depends on the 14% plus tax on workers to operate the general budget, so of course they try to scare everybody all of the time. Maybe we need to take monetary policy out of the hands of a handful of private individuals who literally own the Federal Reserve under a privatized agency agreement slipped through Congress in 1913 by the nearly fascist, definitely oligarchic, and clearly elitists in the country. The Federal Reserve competes with the Federal government for interest vs. taxes in the race to drive 97% of the population into a low standard of living compared to where they should. If it isn't broke don't fix it, but if it is broke fix it, even if it involves the scary thought to the elite of having a renationalized central bank which serves the people and the nation, and makes the nation strong instead of weak.