Social Security & Savings Rate?

[Coa$t2Coa$t]

How do you treat the amount contributed to Social Security (out of paycheck) when calculating your savings rate?  Do you treat it like a tax or do you consider it as an amount saved?  Do you count it as income?

Thanks!

[Syonyk]

Tax. I assume I'll never see any of it again.

[Greystache]

I am retired and no longer saving for retirement.  When I was saving, I considered SS to be a tax.  Although I am retired, it will be a long time before I plan to start collecting SS, probably at least 10 years down the road.  I am not as pessimistic as some about collecting SS.  I don't assume that I will never collect a penny.  I take the amount that is due to me and multiply it by .75 for planning purposes. I don't consider future SS payments as part of my net worth.  I made sure I could survive on my investment income and small pension.  SS is icing on the cake.

[Classical_Liberal]

I am retired and no longer saving for retirement.  When I was saving, I considered SS to be a tax.  Although I am retired, it will be a long time before I plan to start collecting SS, probably at least 10 years down the road.  I am not as pessimistic as some about collecting SS.  I don't assume that I will never collect a penny.  I take the amount that is due to me and multiply it by .75 for planning purposes. I don't consider future SS payments as part of my net worth.  I made sure I could survive on my investment income and small pension.  SS is icing on the cake.

+1

This is exactly what I do and think it is fairly consistent with conservative long term planning.  To count it as savings would indicate it has a present cash value that can be drawn upon, which it does not.  Many on the forum seem to exclude SS in their calculations, but for those of us who will receive a decent sized benefit, I think that is a mistake.  A relatively frugal person with a 20 year+ income history will probably see SS cover 25-75% of base living expenses at 67. This is not chump change and needs to be considered in any planning, IMO.

[soccerluvof4]

^+2. I believe there will be SS as well but dont figure it because I am sure it will change. Having said that though if they were to eliminate it we as a country would have worse things to worry about.

[2Birds1Stone]

I treat it as a tax that I will get nothing out of in 40 years when I am old enough under current law to draw from it.

[SwordGuy]

How do you treat the amount contributed to Social Security (out of paycheck) when calculating your savings rate?  Do you treat it like a tax or do you consider it as an amount saved?  Do you count it as income?

Thanks!

It's a tax.   I only count it as income when it starts to come in, or, in the case of my wife who will be filing next year, when it will soon be coming in.

I count 75% of what I expect to receive as future income, but I made sure I'm not depending on it.

[Bracken_Joy]

I just count it as a tax. Maybe I would do differently if I was closer to the age where I could receive it, but as it is, I treat it kinda like an inheritance: it'll be awesome if I see it, but I'm sure not counting on it.

[Spork]

Similar to all above.  It's a tax.  I expect there will be some benefit, some day.  But the chances of me accurately computing exactly what percentage of the deduction is a benefit... that is math and prediction that is above my abilities.

Some day I will get a monthly payment and I will call that income.  But on my books, I will have the expense and the income totally separated from each other.

[robartsd]

Does anyone exclude SS tax from their expenses? It seems to me that including SS and Medicare taxes (and to a certain extent even ordinary income taxes) as expenses would cause people to overestimate how much they need to save.

[Spork]

Does anyone exclude SS tax from their expenses? It seems to me that including SS and Medicare taxes (and to a certain extent even ordinary income taxes) as expenses would cause people to overestimate how much they need to save.

I am FIRE now... but yeah, I included it.  I took the detailed check and placed every line of my check into gnucash as income or expense.

I think you'll find a list a mile long of expenses that are not incurred in FIRE.  Pretty much everything causes people to overestimate how much they need to save.  Income tax, FICA, Auto:Gas, ...   The list is long.

[MDM]

Does anyone exclude SS tax from their expenses?

Current expenses: No - it is a tax just like any other.
Future (retirement expenses): Yes - because I expect zero earned income, therefore zero SS tax.

[GetItRight]

I treat it like a tax and categorize it as such in Mint. It's an unconstitutional ponzi scheme as implemented at the federal level, I wish I could opt out. I don't plan for retirement with any income from government, but if I ever do I will count that as a tax as well (negative tax, against whatever taxes I pay while collecting).

[Indexer]

It's a tax today.

It 'might' be a benefit in the future. Based on SS administration's projections you might get 75% of your actual stated benefit.

You have about 1/122,000,000 control over whether you get it and even less control over how much you get.

[dude]

Such pessimism.  It's savings in my view.  I fully expect a return on that money, even if (unlikely) only 77% of expected benefit. Those of you who don't only contribute to making it a self-fulfilling prophecy by your apathy in the face of assaults on the program. Considering the program's success in keeping old people out of poverty, that's pretty sad.

[GetItRight]

Considering the program's success in keeping old people out of poverty, that's pretty sad.

Theft from one to give to another is not keeping the recipient out of poverty. The old people who rely on it failed to plan and save appropriately for old age and retirement, they are in fact poor. They just receive welfare, which is money stolen from others. It is not money the government takes and earmarks as yours, puts in an investment account or pays interest on.

[2Birds1Stone]

I agree with GetItRight to a certain extend.

SS is a giant ponzi scheme. It was originally intended to help people in their final years of life when they could no longer work.

With less and less people paying in vs. taking out, on top of increased life expectancy, we are most definitely screwed unless drastic changes are made soon.

[Syonyk]

Such pessimism.  It's savings in my view.  I fully expect a return on that money, even if (unlikely) only 77% of expected benefit. Those of you who don't only contribute to making it a self-fulfilling prophecy by your apathy in the face of assaults on the program. Considering the program's success in keeping old people out of poverty, that's pretty sad.

So my view that demographics and the whims of Washington will make SS less of a thing in the, oh, next 30 years or so it'll be before I can draw any benefits, is somehow contributing to destroying SS?

I contribute to it.  I've been contributing to it for many years.  I've contributed at the cap some years.  I'm just not willing to rely on it given what nonsense I've seen coming out of Washington.  If I get anything out of it, it's a nice bonus after many years of early retirement.

[Rubic]

Future (retirement expenses): Yes - because I expect zero earned income, therefore zero SS tax.

Because all your IRA funds by then will have been converted to Roth accounts?

[Davids]

My ss fix plan. Drop the deduction from 6.2% to 4% so middle and lower class have more money in pay but eliminate the income max so you are always paying the 4%, in essence increase tax on rich and more money goes in ss.

[MDM]

Future (retirement expenses): Yes - because I expect zero earned income, therefore zero SS tax.

Because all your IRA funds by then will have been converted to Roth accounts?

Because SS tax is levied only on "earned" income.  One does not pay SS tax on tIRA withdrawals.  No SS tax on interest, dividends, capital gains, etc., either.

[onlykelsey]

My ss fix plan. Drop the deduction from 6.2% to 4% so middle and lower class have more money in pay but eliminate the income max so you are always paying the 4%, in essence increase tax on rich and more money goes in ss.

SS is only on ordinary income, though.  The wealthy generally do not have much income in the way of salaries.  I guess that would pick up some educated professionals (particularly in HCOL), doctors, etc, but I don't know how much of a change that would make in the overall numbers (and if those are the people whose cost we should be making improvements at).

[Rubic]

Future (retirement expenses): Yes - because I expect zero earned income, therefore zero SS tax.

Because all your IRA funds by then will have been converted to Roth accounts?

Because SS tax is levied only on "earned" income.  One does not pay SS tax on tIRA withdrawals.  No SS tax on interest, dividends, capital gains, etc., either.

Ah, I misread your first comment.

[BoonDogle]

How do you treat the amount contributed to Social Security (out of paycheck) when calculating your savings rate?  Do you treat it like a tax or do you consider it as an amount saved?  Do you count it as income?

Thanks!

Back to the OP's question, I deduct income tax and FICA tax from gross income to get my income after tax number.  Divide amount remaining after expenses by income after tax to get my savings rate.

[EnjoyIt]

My ss fix plan. Drop the deduction from 6.2% to 4% so middle and lower class have more money in pay but eliminate the income max so you are always paying the 4%, in essence increase tax on rich and more money goes in ss.

Ahh, good idea.  I pay less while others pay more. Sounds fair to me.

[NESailor]

My ss fix plan. Drop the deduction from 6.2% to 4% so middle and lower class have more money in pay but eliminate the income max so you are always paying the 4%, in essence increase tax on rich and more money goes in ss.

Ahh, good idea.  I pay less while others pay more. Sounds fair to me.

Well, my effective FICA tax rate is 6.4%.  My boss's is only about 4% because not all his income is subject to it.  Fair?  Maybe.

[Ramblin' Ma'am]

I assume I will get some benefit, but I don't factor it into my plans. I am in my mid-30s, so by the time I'm eligible to collect, I have no idea what the program will look like. I don't expect it to go bankrupt, but it may not be able to pay out as much as it does now.

[Coa$t2Coa$t]

Thanks everyone for their input.  I will continue to count it as a tax.

Coa$t2Coa$t

[fredbear]

...It's an unconstitutional ponzi scheme as implemented at the federal level, I wish I could opt out.

Agree.  It would have taken very few years of investing the 12.8% (it is nonsensical to believe that part is contributed by the employer; that is money that would have been yours) at a very conservative interest rate, to produce a retirement fund that would generate far more income than I am receiving from the Social Security Program.  The estimates I have read state it is "earning" 0.75%.  I never counted it when planning for retirement, and now that I am retired I use it to pay down principal on my children's home loans.  When/if it goes tits up or gets means-tested or gets gutted by un-acknowledged inflation and they lose everything that has been extracted from them and dumped into the system, they will be closer to, or actually have, at least one paid-off house each. 

[Indexer]

Such pessimism.  It's savings in my view.  I fully expect a return on that money, even if (unlikely) only 77% of expected benefit. Those of you who don't only contribute to making it a self-fulfilling prophecy by your apathy in the face of assaults on the program. Considering the program's success in keeping old people out of poverty, that's pretty sad.

If it was organized like a FUNDED pension then I would agree with everything you say, and then it would likely pay out 100%.

It isn't. It's an unfunded program that pays current benefits out of current taxes. Millennials will get less out of it than we put in on average. That is NOT savings. Gen X will likely experience the same problem. That is actually taking money that could be used for retirement saving. Boomers, like every generation before them, will get more out than they put in. They are likely still getting less than they would had they saved that same money with interest. 

Social Security had high aspirations when it was created. However, it is unfunded, and voters kept voting themselves better and better benefits without any plan to pay for it. If they do try to fix it they will likely fix it by either raising the retirement age or by increasing taxes, both of which redistribute even more wealth from the young to the old. Or they increase means testing. People with assets get smaller benefits.

To jump in with the people calling it a ponzi scheme. I've had that debate before. It is technically different, but using current income to pay out current benefits does make its structure very similar to a ponzi scheme.

[fredbear]

...
To jump in with the people calling it a ponzi scheme. I've had that debate before. It is technically different, but using current income to pay out current benefits does make its structure very similar to a ponzi scheme.

Yes, it is worse than a ponzi scheme.  A ponzi scheme promises investment results but doesn't effectively invest, or doesn't invest at all.  The promised returns are made by diverting later contributions to early adopters.  Mathematically, it must collapse when the base of the pyramid cannot keep up with the payments to the top.  Social Security is all of that, but in addition it has child support and disability components which make it even less likely to work out, and sooner to collapse.  They are paid out to people who never contributed.  The simple test I apply is heritability.  If there is an account with my name on it that they say contains money, but I cannot will it to my my kids if I choose not to spend it, then there is no such account. 

A point not made often enough about the SS system is its racism.  Consider the life expectancy of black males vs white males.  Typically the life expectancy of the blacks is very shortly after they become eligible to receive social security.  They are deprived of the 12.4% for a 45-year working life, and when they are ready to get some benefit back, die.  In a real system with real money in it, their undistributed contribution would go to their heirs.  It does not.  We (I am a white male geezer) get to live on their contributions as well as our own until we play out, about 15 years later. 

[dude]

all this nonsense talk of theft and Ponzi schemes -- man, have these forums gone downhill in the past year or two. 

[Daisy]

You can go to the SS web site and enter your info and get an estimate of the SS you'll receive.

You can then use cfiresim and input this expected SS income for the year you expect to start collecting it. You can multiply the amount expected by 0.75 if you want to be conservative.

I used to be in the don't  count SS crowd. But I'm in my late 40s so I do expect something.  I figure if our country gets to the point where SS is not paid out, any financial plan I had come up with would also be in serious jeopardy....so what's the point of worrying.

Same thing with ACA subsidies being removed. If they are and not replaced with an affordable alternative...well insurance companies would go under because no one will afford it.

[JumpInTheFIRE]

A point not made often enough about the SS system is its racism.  Consider the life expectancy of black males vs white males.  Typically the life expectancy of the blacks is very shortly after they become eligible to receive social security.  They are deprived of the 12.4% for a 45-year working life, and when they are ready to get some benefit back, die.

LOL WUT?  The life expectancy for a white male and black male near retirement age are about the same.  I tested this on this actuarial calculator: https://www.myabaris.com/tools/life-expectancy-calculator-how-long-will-i-live/

The results showed only a 1 year life expectancy difference between a 60 year old white male and black male (for my criteria, it gave the black male a 90 year life expectancy and the white male a 91 year life expectancy).  Do you have some data to support your assertion that "Typically the life expectancy of the blacks is very shortly after they become eligible to receive social security"?

[Zoot]

I'm in the don't-count-on-it camp; I disregard SS benefits in FIRE planning, and I count it as a tax in my spreadsheets.  I'm even more in that camp now, given that the ACA is on the chopping block, and that Ryan et al. have set their sights on Medicare, as well--to say nothing of the possibility of Roth conversions going away.  I'm working on revising my plan to assume that DH and I will need to fund our own insurance from the time we renounce employer-based coverage until death. 

If there's anything I've learned this week, it's that our plan has to include some kind of provision for base assumptions getting changed out from under us.