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In Social Security, a shift in value for future retirees

Sunday, August 5, 2012 | 8:24 p.m. CDT

Few issues touch as many people in the United States as does Social Security. In a four-part series continuing through August, The Associated Press examines the changing dynamics of the government retirement program and what it means for workers and present and future beneficiaries. This first story examines whether Social Security is still a good deal, and for whom.

WASHINGTON — People retiring today are part of the first generation of workers who have paid more in Social Security taxes during their careers than they will receive in benefits after they retire. It's a historic shift that will only get worse for future retirees, according to an analysis by The Associated Press.

Social Security by the numbers

You can't get these returns today

The first person to get a monthly retirement check from Social Security certainly got her money's worth. Ida May Fuller, a retired legal secretary from Ludlow, Vt., received her first monthly check in January 1940. She was 65 years old and lived to be 100. She had paid Social Security taxes for three years.

  • Social Security taxes paid by Fuller during her career: $24.75.
  • Fuller's first monthly benefit check: $22.54.
  • Fuller's lifetime benefits: $22,888.92.

Who gets Social Security

About 56 million people receive monthly Social Security benefits.

  • 36 million retired workers. Average monthly benefit: $1, 235.
  • 8.7 disabled workers. Average benefit: $1, 111.
  • 2.5 million spouses. Average benefit: $590.
  • 4.3 million children. Average benefit: $564.
  • 4.4 million widows and widowers. Average benefit: $1, 152.

How benefits have changed

The lifetime value of taxes is based on the value of accumulated taxes paid, as if those taxes were put into an account that earned an annual 2 percent interest rate, plus inflation. The examples are for a married couple in which both spouses earned average wages ($43,500 in 2011). Projected benefits assume that both spouses have average life spans after turning 65. Want more benefits? Live longer.

If you turned 65 in 1960:

  • Lifetime Social Security benefits: $259,000.
  • Lifetime Social Security taxes: $36,000.

If you turned 65 in 1980:

  • Lifetime benefits: $452,000.
  • Lifetime taxes: $192,000.

If you turned 65 in 2010:

  • Lifetime benefits: $555,000.
  • Lifetime taxes: $588,000.

If you turn 65 in 2030:

  • Lifetime benefits: $699,000.
  • Lifetime taxes: $796,000.


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Previous generations got a much better bargain, mainly because payroll taxes were very low when Social Security was enacted in the 1930s and remained so for decades.

"For the early generations, it was an incredibly good deal," said Andrew Biggs, a former deputy Social Security commissioner who is now a scholar at the American Enterprise Institute. "The government gave you free money and getting free money is popular."

If you retired in 1960, you could expect to get back seven times more in benefits than you paid in Social Security taxes, and more if you were a low-income worker, as long you made it to age 78 for men and 81 for women.

As recently as 1985, workers at every income level could retire and expect to get more in benefits than they paid in Social Security taxes, though they didn't do quite as well as their parents and grandparents.

Not anymore.

A married couple retiring last year after both spouses earned average lifetime wages paid about $598,000 in Social Security taxes during their careers. They can expect to collect about $556,000 in benefits, if the man lives to 82 and the woman lives to 85, according to a 2011 study by the Urban Institute, a Washington think tank.

Social Security benefits are progressive, so most low-income workers retiring today still will get slightly more in benefits than they paid in taxes. Most high-income workers started getting less in benefits than they paid in taxes in the 1990s, according to data from the Social Security Administration.

The shift among middle-income workers is happening just as millions of baby boomers are reaching retirement, leaving relatively fewer workers behind to pay into the system. It's coming at a critical time for Social Security, the federal government's largest program.

The trustees who oversee Social Security say its funds, which have been built up over the past 30 years with surplus payroll taxes, will run dry in 2033 unless Congress acts. At that point, payroll taxes would provide enough revenue each year to pay about 75 percent of benefits.

To cover the shortfall, future retirees probably will have to pay higher taxes while they are working, accept lower benefits after they retire, or some combination of both.

"Future generations are going to do worse because either they are going to get fewer benefits or they are going to pay higher taxes," said Eugene Steuerle, a former Treasury official who has studied the issue as a fellow at the Urban Institute.

How can you get a better return on your Social Security taxes?

Live longer. Benefit estimates are based on life expectancy. For those turning 65 this year, Social Security expects women to live 20 more years and men to live 17.8 more.

But returns alone don't fully explain the value of Social Security, which has features that aren't available in typical private-sector retirement plans, said David Certner, legislative policy director for AARP.

Spouses can get benefits even if they never earned wages. Children can get benefits if they have a working parent who dies. People who are too disabled to work can get benefits for life.

Because of spousal benefits, most married couples with only one wage earner will continue to get more in benefits than they pay in taxes for the foreseeable future.

"You are buying this lifetime inflation-protected benefit that you can never run out of and that will always be there for you," Certner said. "It protects your spouse, protects your family and protects you from disability."

Certner noted that private pensions, retirement savings and home values took a big hit when the economy collapsed, putting a dent in the retirement plans of many Americans.

"When you have that combination of factors, Social Security becomes more and more important," Certner said. Social Security is financed by a 12.4 percent tax on wages. Workers pay half and their employers pay the other half. Self-employed workers pay the full 12.4 percent.

The tax is applied to the first $110,100 of a worker's wages, a level that increases each year with inflation. For 2011 and 2012, the tax rate for employees was reduced to 4.2 percent, but it's scheduled to return to 6.2 percent in January.

The payroll tax rate was only 2 percent in 1937, the first year Social Security taxes were levied. It did not surpass 6 percent until 1962.

Even with low tax rates, Social Security could afford to pay benefits in the early years because there were more workers paying the tax for each person receiving benefits than there are today. In 1960, there were 4.9 workers paying Social Security taxes for each person getting benefits. Today, there are about 2.8 workers for each beneficiary, a ratio that will drop to 1.9 workers by 2035, according to projections by the Congressional Budget Office.

About 56 million people now collect Social Security benefits, and that number is projected to grow to 91 million in 2035. Monthly benefits average $1,235 for retired workers and $1,111 for disabled workers. Social Security provides most older Americans a majority of their income. About one-quarter of married couples and just under half of single retirees rely on Social Security for 90 percent or more of their income, according to the Social Security Administration.

"Social Security is what's carrying me," said Neta Homier, a 79-year-old retired hospital worker from Toledo, Ohio. "There's no way I would have made it without it. The kids, they're on their own, now, and I'm not going to be a burden for them. That's what it would have been if I hadn't had Social Security."

Homier said she started receiving Social Security when she was 63 and now gets about $800 a month, after her Medicare premiums are deducted. She said her father died at 51, so he never received Social Security, and her mother died at 71 and collected benefits for only a few years.

"It's definitely worth it," she said.

At 52, Anthony Riley of Columbus, Ohio, has a different perspective. Riley said he has a private retirement account because he worries that Social Security won't provide adequate benefits throughout his retirement.

"I use to think that it was worth paying for your Social Security, but now I don't think so," Riley said. At 22, Mackenzie Millan of Los Angeles has even greater doubts about whether Social Security will be a good deal for her.

"The money that I put aside now, it's not like that money is going to be waiting for me. That money is going toward someone else," the recent college graduate said. "If I wanted Social Security 50 years from now, when I wanted to retire, I would have to hope that someone else is still working and putting money aside in their paychecks to pay for my Social Security at that point."

Associated Press writer Andres Gonzalez contributed to this report.


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Comments

Ellis Smith August 6, 2012 | 6:24 a.m.

See "Ponzi" in an unabridged dictionary. A characteristic of all Ponzi schemes is that early "investors" receive more than they put into the scheme. This, in turn, encourages new investors. Without that feature, the scheme wouldn't work.

Where Social Security differs is that it is a government-mandated scheme, whereas all true Ponzi schemes are by their very nature voluntary.

Social Security is NOT a Ponzi scheme*, but in this one respect it looks like one.

*- It's not insurance either. The United States Supreme Court has ruled it's welfare.

(Report Comment)
Mark Foecking August 6, 2012 | 9:29 a.m.

The unfortunate part of it is if a person were free to invest their Social Security contributions in private retirement investments, they'd get two to three times what they'll get from Social Security, plus be able to leave it to their children. But we have what we have and it's unlikely to change - retired voters are the single largest and best organized of any group of voters, and most of them get very upset when anyone suggests changing Social Security.

DK

(Report Comment)
Christopher Foote August 6, 2012 | 10:45 a.m.

@DK,

"...if a person were free to invest their Social Security contributions in private retirement investments, they'd get two to three times what they'll get from Social Security..."

That assumes a rational investment strategy. In the absence of SS, what would you propose the government do for those that do not invest wisely (and are therefore broke) and are no longer productive members of society? SS is probably much cheaper in the long run than having to enlarge the safety net to account for poor investment decisions by the populace. Moreover that 2-3 times return doesn't come about from investing in treasuries or other risk free financial instruments. It would entail massive capital transfers to the financial industry who have demonstrated a profound lack of ethics, social responsibility and common sense. Today's financier has much different incentives than those of the past upon which your 2-3 times returns is based. As the fine print says: past performance is no guarantee of future success.

(Report Comment)
frank christian August 6, 2012 | 11:24 a.m.

Only alternative investment of SS funds that I have read, suggest only a "portion" of the fica "taxes" be allowed. Why not work out a "Thrift Savings Account" list of other investments as is offered to Federal employees now?

Of course, Chris would be concerned that a Congress may not be able to spend these monies as they become available.

Has not the "fine print" always said,"past performance is no guarantee of future success"? One should not compare All financiers to those of the liberal, Obama species.

(Report Comment)
Christopher Foote August 6, 2012 | 11:54 a.m.

@Frank,

Economy under president A: Increased private employment by 0.3 million decreased public employment by 0.6 million.

Economy under president B: Decreased private employment by 0.6 million increased public employment by 1.7 million.

Which do you prefer?

I'll make it easier,
Under president A, federal spending increased at roughly 1.4% per year.
Under president B, federal spending increased at roughly 7.5% per year.

Why don't you choose which one you like, and than click on this link to reveal the identity of A and B:
http://www.marketwatch.com/story/obama-s...

(Report Comment)
Ellis Smith August 6, 2012 | 12:19 p.m.

Stripped to its core, the Socialist argument is that because we are stupid* and improvident* and incapable of acting as if we are responsible adults*, we need government to act for us.

I might buy that argument IF Socialist governments were actually provident.

*-Of course the person who is MAKING that argument never considers himself or herself to be any of those things. Perish the thought! :)

(Report Comment)
Jimmy Bearfield August 6, 2012 | 2:24 p.m.

"In the absence of SS, what would you propose the government do for those that do not invest wisely (and are therefore broke) and are no longer productive members of society?"

Nothing. Those unwilling or unable to learn the basics of investing can always choose CDs or hire a broker. Those unwilling to save/invest at all should suffer the consequences, and those who believe that that's harsh are free to open their homes and wallets to them.

(Report Comment)
Richard Saunders August 6, 2012 | 2:54 p.m.

This ponzi scheme, (as correctly recognized in the article by Mackenzie Millan) would've blown up long-ago if not for the additional counterfeiting scheme also employed by the criminal cartel d.b.a "Rome on the Potomac."

Anybody who believes that bureaucrats in DC are an affordable retirement planning option should sit tight and let the rest of us out of the trap. Then they can tell us how smart they are.

(Report Comment)
frank christian August 6, 2012 | 3:14 p.m.

Chris F. - More interesting "as a% of" word games? Did Congress know these facts? It seems some of them might have voted his Budgets. Maybe not spending enough for the D's. I thought this part of your story was interesting.

"The 2009 fiscal year, which Republicans count as part of Obama’s legacy, began four months before Obama moved into the White House. The major spending decisions in the 2009 fiscal year were made by George W. Bush and the previous Congress." Then I saw this: (the article was about Obama praising the 2009 "Bush" budget, on the floor of the Senate.)

"When the final conference report was presented to the House on June 5, not one Republican voted for it.

This means the 2009 budget was almost exclusively approved by Democrats, with "Yeas" coming from current President then Sen. Obama, his current Vice President then Sen. Joe Biden, his current Chief of Staff then Rep. Rahm Emanuel, and his current Secretary of State then Sen. Hillary Clinton."

Remember the old liberal axiom (that I thought up)? "Blame whomever you want, but never blame a Democrat!"

(Report Comment)
Christopher Foote August 6, 2012 | 3:52 p.m.

@Frank,
First, Bush signed it, nobody forced his hand.
Second, does that mean the house Republicans are responsible for this year's budget deficit as well as the 2011 deficit or is that all on Obama as well? I'm curious as to what the rules are if when a Republican is president it's the Democratic house that drives the deficit, but when a Democratic President is in power, a Republican led house is absolved from any and all responsibility. Wash, rinse and repeat...

(Report Comment)
Rich C. August 6, 2012 | 4:31 p.m.

Frank likes double-standards. You'll never convince him otherwise.

(Report Comment)
Jimmy Bearfield August 6, 2012 | 5:04 p.m.

"I'm curious as to what the rules are if when a Republican is president it's the Democratic house that drives the deficit, but when a Democratic President is in power, a Republican led house is absolved from any and all responsibility."

Congress, not the president, controls taxes and spending. A president can choose to sign or veto a bill, but Congress still has the ultimate say because it can override a veto.

A president can urge, advise, cajole or browbeat Congress into doing his bidding, but ultimately the choice is up to Congress. In that regard, Obama has proven that he is no LBJ.

(Report Comment)
frank christian August 6, 2012 | 5:10 p.m.

CF - You have brought us far from SS, and have now confused me. Of course Bush is responsible for signing it. Did he not present it to Congress? As we know, N. Pelosi knows not what a "budget" is. Aren't we agreed that those who have voted For an action or document are responsible for the outcomes that occur from the matter in the measure? No R' voted for this Budget. Neither R, nor D, has voted for Obama's budgets.

"Wash, rinse and repeat." is absolutely the wrong term for the House, since 2010 and you must know it. The R' efforts to improve the economy and reduce deficits have been fought tooth and nail by every D' in Congress except K. Warner and he was kept off of the committee formed for that purpose. "They're never go to let me on that committee". 30 bills for improvement of economy have passed the House and now lay in Harry Reid's Senate, never to even be discussed. Should the "rules" be, blame the R's, because they control the House! How a lawmaker votes determines blame or praise. Votes drive the deficits, do they not?

(Report Comment)
Derrick Fogle August 6, 2012 | 6:17 p.m.

A Poignant Picture of Death Panels: Jimmy Bearfield lays it bare:
August 6, 2012 | 2:24 p.m.
"Those unwilling to save/invest at all should suffer the consequences, and those who believe that that's harsh are free to open their homes and wallets to them."

...

(Report Comment)
Jimmy Bearfield August 6, 2012 | 7:15 p.m.

Lose the hyperbole, Derrick. Grownups take responsibility for themselves, including their retirement. Those who don't can turn to you. You will open your home and wallet to them, won't you? Or are you secretly hoping that only "the rich" will have to pony up?

(Report Comment)
Ellis Smith August 7, 2012 | 4:54 a.m.

Maybe we should conduct a poll; polls are nice. If you word the questions carefully, you can get just about any result you wish. :)

Question: Would you rather have to live a shortened life, or would you prefer to be kept in the status of a dependent child, even though you have grown to maturity, received an adequate education, and you hold a responsible job?

Many of us would prefer that NEITHER of those two conditions apply, but in any case we'd appreciate being given a choice and not having it made for us.

(Report Comment)
Mark Foecking August 10, 2012 | 3:36 a.m.

frank christian wrote:

"Why not work out a "Thrift Savings Account" list of other investments as is offered to Federal employees now?"

That's not a bad idea, and it's one that might scale well for the people that might choose it as an alternative to SS. My idea would be to make participation in SS optional, and the payroll taxes could be invested in funds such as the TSP offers, or even used as regular income. Moreover, one could participate in SS on a year to year basis, and one's total participation would determine one's SS benefit at retirement. The rest would have to be made up from the "TSP" investments or other funds.

Here's the performance of the TSP over the last 10 years:

https://www.tsp.gov/investmentfunds/annu...

We see that while individual funds have a lot of ups and downs, the average return has been about 4%.

My average salary over my career has been about $30,000/yr not adjusted for inflation. If I had been able to invest the 12.4% SS contribution in a funds like the TSP, I'd have about $300,000 at age 65 (and if I made the right decisions at the right times, it could be quite a bit more). From SS, I'll get about $1200/mo, and if I live another 15 years, I'd get $216,000 in benefits. So it's really not out of the question, even today, to make more for retirement in a private market than with SS. And that would be one less person requiring benefits paid by current workers.

I'm not saying this is for everyone, or that even that many people would opt out of SS. But as the article mentions, SS is looking at severe solvency problems in future years, and some people might be willing to take the risk that comes from private investment. I just think people should have that option.

DK

(Report Comment)
mike mentor August 10, 2012 | 8:31 a.m.

Christopher and Rich, oh ye of little faith!

You will see the improvements you want, once the Republicans actually do have control of Congress. We only have a few short months to wait !!!

P.S. If you really are concerned, you can do your part by making sure Claire doesn't go back !!!

(Report Comment)
Rich C. August 10, 2012 | 11:00 a.m.

I thoroughly enjoy Mike's premature celebration...Especially in light of the most recent presidential polling.

(Report Comment)
frank christian August 10, 2012 | 11:47 a.m.

R. Cookley - It would really interesting and informative for we all, if you could give us a detailed reasoning for your continued hopeful postings for the return of B. Obama and Democrats to the leadership of our country.

Most of us are dismayed at the record debt which has done nothing for the "people" incurred since 2007, the horror of the records set in unemployment, and His obvious intent to change our way of life, with or without Congress (gutting of successful welfare reforms, his latest).

You could relate why you think these are such good occurrences for our country that we need to make sure we continue them, or perhaps enlighten us on the subject: "Why would anyone ever vote for a Democrat again."

(Report Comment)
frank christian August 10, 2012 | 8:33 p.m.

Mark F. - Nice to agree once in a while, or even just once. I wondered why W. Bush did not throw the TSA for Federal Workers into his argument for alternative investment of SS funds for we all. A slap in the face of Democrats crying because someone may want to Touch Their SS was what was needed. Bush, as we know really hated to "slap", Democrats.

Also, a really nice admission would be to add to " I just think people should have that option." "But, as long as a Democrat in our government, is in position to stop "that option", it will never occur!" I wish.

(Report Comment)

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