Social security value

[wageslave23]

When I run the numbers, it seems like I'm getting about the full value of my social security deduction paid back to me. If I haven't worked the full 35 years maximum, then assume I'm going to make $100k next year. This would raise my 35 yr avg by $3k. At the 32% bend point, I'm getting $1000 more in yearly benefits for earning that extra $100k. The future value of that $1k per year, I figure by using a 6% discount rate instead of the 4% rule since we are looking more at averages instead of worst case. So $1k divided by .06 equals $16k. On the $100k earned I'm paying $6200 into social security.  If I had invested that money for 30 yrs instead (at 3% real returns), I would be looking at roughly $15k. There's a lot of hand wavy math, but it seems like if you are a middle earner, you end up getting your money's worth from ss contributions.  If you also live 30yrs beyond 67.  Anyone want to check my calculations? I'd probably rather just keep my own money but definitely not as bad of a tax as I thought.

[uniwelder]

I haven’t checked your numbers, but doesn’t that also assume benefits won’t decrease or the eligibility age change? From everything I hear about SS funding, it sounds like benefits calculated now are optimistic. I have at least 20 years before SS factors in.

[YttriumNitrate]

On the $100k earned I'm paying $6200 into social security.

Don't forget about the $6200 that your employer had to put into SS instead of your paycheck.

[Sugaree]

On the $100k earned I'm paying $6200 into social security.

Don't forget about the $6200 that your employer had to put into SS instead of your paycheck.

It's a mighty bold assumption that employers would add that to employees' paycheck.

[Runrooster]

I can’t figure out how to quote the post here, but I asked a similar question in November. @MDM pointed me to this https://www.bogleheads.org/forum/viewtopic.php?p=2268553#p2268553 link that shows social security is about break even even at the 15% rate. Below that, 32%, you are getting your and employer value.

I thought this was pretty surprising but not enough to avoid payroll deduction today.

[YttriumNitrate]

On the $100k earned I'm paying $6200 into social security.

Don't forget about the $6200 that your employer had to put into SS instead of your paycheck.

It's a mighty bold assumption that employers would add that to employees' paycheck.

There's some pretty good contractor/employee data out there relating to how removing benefits, such as the 6.2% employer SS contribution, impacts the amount employers paid. Exactly how much it impacts pay is debatable.

[gary3411]

On the $100k earned I'm paying $6200 into social security.

Don't forget about the $6200 that your employer had to put into SS instead of your paycheck.

It's a mighty bold assumption that employers would add that to employees' paycheck.

It's already a labor expense. It's reasonable to assume it would, on average.

[lifeisshort123]

30 years of benefits, living to 97 is a huge assumption.

Best SS investment is people who married young and had only one spouse work (and therefore pay the tax), and both live long lives.

[Ron Scott]

From everything I hear about SS funding, it sounds like benefits calculated now are optimistic. I have at least 20 years before SS factors in.

Funding is not an issue for the federal government since it can obviously create money and give it to anyone it chooses. The trick is to ensure adequate resources to create sufficient goods and services those with money need.

[PDXTabs]

On the $100k earned I'm paying $6200 into social security.

Don't forget about the $6200 that your employer had to put into SS instead of your paycheck.

It's a mighty bold assumption that employers would add that to employees' paycheck.

For most jobs the market sets the rate of pay, more or less. My labor pays for that other half of SS.  What my boss really cares about is what they pay for my salary+benefits, and whether or not they can get someone else to do the same job for less. I'm not sure that it is such a bold assumption.

[vand]

Unlike an individual, a Government can afford to take the actuarial life expectancy numbers for the average person as gospel for their own projections and have a high degree of confidence that is going to be a very close number to what they need to plan for.

[Ron Scott]

"Good investing is not a function of buying good things, it’s a function of buying things well. ...if you don’t know the difference between buying the good asset and making a good investment, then you’re not gonna be a successful investor.

There is no asset which is so good that it can’t become overpriced and thus a bad investment. There are very few assets which are so terrible that they can’t become under-priced and that’s a good investment. " -- Howard Marks

Being good is useless compared to doing better.

[wageslave23]

I forgot about the employer portion. That makes sense, no way the government could be that efficient with my tax dollars.  Plus the people who only pay in for a few years and then collect for a lifetime with dependents.

[Chris Pascale]

I'm not sure when my grandmother opted to start collecting, but she is close to 100.

She also receives her pension from the telephone company for the past 42 years, and my grandfather's reduced-pension for 30 years since his passing.

The values can be hard to calc on the front-end.

[Scandium]

I forgot about the employer portion. That makes sense, no way the government could be that efficient with my tax dollars.  Plus the people who only pay in for a few years and then collect for a lifetime with dependents.

If by a few you mean 10, since you need "40 quarters" of contributions to collect. And it's based on how much you've earned. Even 10 years of minimum wage will get you very little. And plenty of people die shortly after starting to collect, per definition of "average life expectancy".

[coppertop]

My mother died at age 50, and never collected.  My father got the paltry "death benefit" - not sure what it was in 1980.  $250?  My sister was 17.  She couldn't collect the month my mother died, since Mom was alive for five days that month.  She received payments the next two months, and turned 18 on the 26th of the fourth month, so she received nothing that month either.  That's all my family received for all of the years my Mom paid into SS.  There are surely a lot of stories like this one.  Also, my first husband, from whom I was divorced, died suddenly at age 64, never having collected.  His and his employer's contributions remained in the 'trust fund.'  I wonder how the contributions of folks who never collected, or whose families received very little, impact the overall value of the 'trust fund.'

[Sugaree]

On the $100k earned I'm paying $6200 into social security.

Don't forget about the $6200 that your employer had to put into SS instead of your paycheck.

It's a mighty bold assumption that employers would add that to employees' paycheck.

For most jobs the market sets the rate of pay, more or less. My labor pays for that other half of SS.  What my boss really cares about is what they pay for my salary+benefits, and whether or not they can get someone else to do the same job for less. I'm not sure that it is such a bold assumption.

And how many employers are going to see this as a way to cut labor costs by 6+%?  Maybe your boss wouldn't, but I suspect that a lot will.  Especially low paying jobs and/or jobs where the powers that be are beholden to shareholders. 

[PDXTabs]

On the $100k earned I'm paying $6200 into social security.

Don't forget about the $6200 that your employer had to put into SS instead of your paycheck.

It's a mighty bold assumption that employers would add that to employees' paycheck.

For most jobs the market sets the rate of pay, more or less. My labor pays for that other half of SS.  What my boss really cares about is what they pay for my salary+benefits, and whether or not they can get someone else to do the same job for less. I'm not sure that it is such a bold assumption.

And how many employers are going to see this as a way to cut labor costs by 6+%?  Maybe your boss wouldn't, but I suspect that a lot will.  Especially low paying jobs and/or jobs where the powers that be are beholden to shareholders.

Because if they can get away with cutting my salary+benefits 6% wouldn't they just do it? That's not really a hypothetical. I worked for two companies (one a Dow component) that cut salaries by up to 20% during downturns and mostly got away with it. But when too many people eventually left they eventually had to raise salaries again.

I do agree that at the very low end, specifically minimum wage, that they would probably get away with it. But the vast majority of workers don't work for minimum wage.

[moof]

My own situation using crude numbers:
Age: 46
SSA benefits age: 70
Assumed death age: 84 (SS assumes about this, so why not)
Rate of inflation adjusted earnings: 7%
SSA amount: $48k

Present day value of 15 years starting that far in the future is $86k, or about 6% of my current portfolio.  Put another way, SS benefits let me assume a 4.24% SWR instead of a 4%.

All very crude back of the (Excel) napkin stuff, but it means I can mostly go about ignoring SS when I have >20 years before collecting.  Basically delayed benefits are my insurance against living too long and are protected against as many personal calamities as asset can be.

[rantk81]

41 years old, and I will hit the 2nd bend point this fall.
Using all kinds of retirement simulators, if SS isn't changed to reduce my future benefits, I'd be pretty safely able to Fat-FIRE right now.

I don't think it is prudent to count on the whole value, as the congresscritters seem to always make the "younger" (e.g. people more than 15 years away from retirement) bear all of the pain when they make changes/cuts to benefits or increases to costs.  Additionally, the not-indexed-to-inflation thresholds for how much SS income is taxable will continue to diminish the value of the future benefits -- especially more-so now that inflation has ratcheted up.

I think it is probably prudent to assume my FRA will probably increase a few years.  I think it is also prudent to assume that the value of any future benefits would be about half of what would otherwise be projected under the current rules of the system.

[YttriumNitrate]

One other thing to consider with social security is the value associated with the survivor and disability benefits. In my case, I'd probably be paying an extra $400-600/yr for life insurance if social security wasn't around. I haven't run the numbers on disability insurance, but I'm sure there's a savings there as well.

[Alternatepriorities]

A thought experiment:

Assuming that SS is primarily security net designed and is necessarily calculated around the assumption of average results...

Maximizing the value of SS for yourself is a matter of not being average.

One self explanatory way to do that is to live longer than average. Of course that isn't entirely within our own control, but this is MMM. Taking care of your health is step one and has a high probability of contributing to this outcome. The good* news on health is that beating the average in America isn't that much effort.

A second less common but very Mustachian strategy is to work less than average.  I'm self employed so very aware of paying both sides of SS. By my math, the value of my contributions has really fallen since getting to the the .32 inflection point. Working with your numbers which I didn't check against my own: Contributing 12k to SSN now gets me 1k a year for life in 25 starting in 25 years? I'll assume that SS is actually safer than the 4% rule and use 2.5% so 1k per year requires 40k invested 25 years from now. At historical average returns my 12k would have been worth at least 120k by then or 65k adjusted for inflation... Not sure if the 1k a year in your example was adjusted for inflation, either way it's not great. On the other hand extrapolating that to anyone contributing at .9 rate is getting a federally guaranteed ROI comparable to or better than the stock market with very little risk...

To me, that really is the point of SS. It's there so if we screw up our math, someone fails to plan for the future at all, or is truly financially unable to do so, we shouldn't be destitute in old age. If someone has managed to live on a small income all their life, getting 90% of it and medical coverage in retirement should allow them to stop working. The more we earn the more we're expected to plan for our own futures. Not choosing a normal maximum consumption life means I'll still come out ahead if I live an average number of years and do even better if I stay healthy. But I don't really begrudge the system the reduced return on my 12.4% because I like knowing there is a back up system is i mess something up.

*Actually this is sad, but it's good for this limited purpose.

[wageslave23]

A thought experiment:

Assuming that SS is primarily security net designed and is necessarily calculated around the assumption of average results...

Maximizing the value of SS for yourself is a matter of not being average.

One self explanatory way to do that is to live longer than average. Of course that isn't entirely within our own control, but this is MMM. Taking care of your health is step one and has a high probability of contributing to this outcome. The good* news on health is that beating the average in America isn't that much effort.

A second less common but very Mustachian strategy is to work less than average.  I'm self employed so very aware of paying both sides of SS. By my math, the value of my contributions has really fallen since getting to the the .32 inflection point. Working with your numbers which I didn't check against my own: Contributing 12k to SSN now gets me 1k a year for life in 25 starting in 25 years? I'll assume that SS is actually safer than the 4% rule and use 2.5% so 1k per year requires 40k invested 25 years from now. At historical average returns my 12k would have been worth at least 120k by then or 65k adjusted for inflation... Not sure if the 1k a year in your example was adjusted for inflation, either way it's not great. On the other hand extrapolating that to anyone contributing at .9 rate is getting a federally guaranteed ROI comparable to or better than the stock market with very little risk...

To me, that really is the point of SS. It's there so if we screw up our math, someone fails to plan for the future at all, or is truly financially unable to do so, we shouldn't be destitute in old age. If someone has managed to live on a small income all their life, getting 90% of it and medical coverage in retirement should allow them to stop working. The more we earn the more we're expected to plan for our own futures. Not choosing a normal maximum consumption life means I'll still come out ahead if I live an average number of years and do even better if I stay healthy. But I don't really begrudge the system the reduced return on my 12.4% because I like knowing there is a back up system is i mess something up.

*Actually this is sad, but it's good for this limited purpose.

Actually I think the guy that claims "disability" at 35 and collects for the next 50 yrs is ahead of the average.  Living an extra 5 or 10 yrs longer than the average person doesn't mean much compared to the person collecting almost their entire adult life.  Or people who die with a wife and 2 kids.  But I get your point. 

I think you need to use adjusted for inflation rate of return because the social security payments are adjusted for inflation and will be in the future.  Probably around 2% real rate of return is a fair number for comparison purposes.  Since ss is "guaranteed" you should probably use 0% real rate of return in your self investing alternative.  Risk free rate of return is right around inflation.

[Arbitrage]

For the 'old age' part of OASDI, I basically concluded that it's a fantastic investment from 40 credits up until the first bend point, a mediocre investment until the second bend point (when including employer contribution, which I consider to be reasonable, arguments here notwithstanding), and a terrible investment after the second bend point.  However, you should consider that with the OA benefit comes the Survivor and Disability insurance, which are wonderful (ok, I know the survivor benefit is very generous, don't know much about the disability insurance but assume it to be decent as well). 

Overall, sure, I'd rather have had the control of this money from the get-go.  I used to get up in arms about that.  Now, as someone firmly wedged in the 0.32 regime (and who likely won't hit 0.15 due to FIRE), it's more of a shrug of the shoulders.  Not in my circle of control, as MMM would say.  I'll take the money - optimized however I can - whatever it may be once that time comes.  Yes, I will get peeved if/when Congress reduces my benefit to fund the benefits of others, but I've self-insured enough so that it won't break me.

[DaMa]

I think it very unlikely that Congress would change the benefits of anyone close to retirement age.  The 1983 changes went into effect for people who were then 45 or under.   Gen Z is already being noted for their voting power, so Congress is going to have to be careful.  That is very different from 1983.  I think of it as they got those changes in just before the Boomers started voting.

[Arbitrage]

I think it very unlikely that Congress would change the benefits of anyone close to retirement age.  The 1983 changes went into effect for people who were then 45 or under.   Gen Z is already being noted for their voting power, so Congress is going to have to be careful.  That is very different from 1983.  I think of it as they got those changes in just before the Boomers started voting.

I think it likely that they will find a way to change it around the perimeters at least before the trust fund is dry, and the pessimistic part of me is pretty confident I will be part of that perimeter.  Maybe it's FRA increases for younger people only, maybe it's means testing for wealthy people, maybe it's something that hits people with fewer working years, but somehow I'm sure something will come to bite me as it has with all recent government programs.

[Alternatepriorities]

A thought experiment:

Assuming that SS is primarily security net designed and is necessarily calculated around the assumption of average results...

Maximizing the value of SS for yourself is a matter of not being average.

One self explanatory way to do that is to live longer than average. Of course that isn't entirely within our own control, but this is MMM. Taking care of your health is step one and has a high probability of contributing to this outcome. The good* news on health is that beating the average in America isn't that much effort.

A second less common but very Mustachian strategy is to work less than average.  I'm self employed so very aware of paying both sides of SS. By my math, the value of my contributions has really fallen since getting to the the .32 inflection point. Working with your numbers which I didn't check against my own: Contributing 12k to SSN now gets me 1k a year for life in 25 starting in 25 years? I'll assume that SS is actually safer than the 4% rule and use 2.5% so 1k per year requires 40k invested 25 years from now. At historical average returns my 12k would have been worth at least 120k by then or 65k adjusted for inflation... Not sure if the 1k a year in your example was adjusted for inflation, either way it's not great. On the other hand extrapolating that to anyone contributing at .9 rate is getting a federally guaranteed ROI comparable to or better than the stock market with very little risk...

To me, that really is the point of SS. It's there so if we screw up our math, someone fails to plan for the future at all, or is truly financially unable to do so, we shouldn't be destitute in old age. If someone has managed to live on a small income all their life, getting 90% of it and medical coverage in retirement should allow them to stop working. The more we earn the more we're expected to plan for our own futures. Not choosing a normal maximum consumption life means I'll still come out ahead if I live an average number of years and do even better if I stay healthy. But I don't really begrudge the system the reduced return on my 12.4% because I like knowing there is a back up system is i mess something up.

*Actually this is sad, but it's good for this limited purpose.

Actually I think the guy that claims "disability" at 35 and collects for the next 50 yrs is ahead of the average.  Living an extra 5 or 10 yrs longer than the average person doesn't mean much compared to the person collecting almost their entire adult life.  Or people who die with a wife and 2 kids.  But I get your point. 

I think you need to use adjusted for inflation rate of return because the social security payments are adjusted for inflation and will be in the future.  Probably around 2% real rate of return is a fair number for comparison purposes.  Since ss is "guaranteed" you should probably use 0% real rate of return in your self investing alternative.  Risk free rate of return is right around inflation.

I can't in good conscious include claiming disability when I'm not as an option for beating the average so I didn't include it. :)

I agree that SS adjusts for inflation, I was just unclear if you had in you original example with each additional year of work adding 1k/yer to your SS. I will disagree that SS should be treated as no risk investment. It's an annuity that only pays out during my lifetime so unlike my 401k I can't designate who benefits should I pass early. There is another opportunity to maximize the payoff here by marrying someone who should live much longer than myself, but statistically I probably didn't...

[Alternatepriorities]

For the 'old age' part of OASDI, I basically concluded that it's a fantastic investment from 40 credits up until the first bend point, a mediocre investment until the second bend point (when including employer contribution, which I consider to be reasonable, arguments here notwithstanding), and a terrible investment after the second bend point.  However, you should consider that with the OA benefit comes the Survivor and Disability insurance, which are wonderful (ok, I know the survivor benefit is very generous, don't know much about the disability insurance but assume it to be decent as well). 

Overall, sure, I'd rather have had the control of this money from the get-go.  I used to get up in arms about that.  Now, as someone firmly wedged in the 0.32 regime (and who likely won't hit 0.15 due to FIRE), it's more of a shrug of the shoulders.  Not in my circle of control, as MMM would say.  I'll take the money - optimized however I can - whatever it may be once that time comes.  Yes, I will get peeved if/when Congress reduces my benefit to fund the benefits of others, but I've self-insured enough so that it won't break me.

I've come to very similar conclusions. I think my father's experience after he had a heart attack and had to stop doing construction really helped me see the value of the safety net. He was close to retirement age when it happened and so he didn't have to wait long to file. But without the heart attack I'm sure he would have worked several more years before taking SS. With no debt and a house that was his, he was able to live a simple but full life on his modest SS check. To be fair, growing approximately 3/4s of his vegetables, and me cutting most of his firewood to heat his house probably helped...

[YttriumNitrate]

I think it likely that they will find a way to change it around the perimeters at least before the trust fund is dry, and the pessimistic part of me is pretty confident I will be part of that perimeter.  Maybe it's FRA increases for younger people only, maybe it's means testing for wealthy people, maybe it's something that hits people with fewer working years, but somehow I'm sure something will come to bite me as it has with all recent government programs.

Here's a great interactive tool showing various tweaks that could be done to SS and the impact they would have. https://www.crfb.org/socialsecurityreformer/ My guess is that most politically viable options are raising (or eliminating) the cap on earnings subject to payroll taxes, and indexing retirement age to life expectancy.

[Arbitrage]

I think it likely that they will find a way to change it around the perimeters at least before the trust fund is dry, and the pessimistic part of me is pretty confident I will be part of that perimeter.  Maybe it's FRA increases for younger people only, maybe it's means testing for wealthy people, maybe it's something that hits people with fewer working years, but somehow I'm sure something will come to bite me as it has with all recent government programs.

Here's a great interactive tool showing various tweaks that could be done to SS and the impact they would have. https://www.crfb.org/socialsecurityreformer/ My guess is that most politically viable options are raising (or eliminating) the cap on earnings subject to payroll taxes, and indexing retirement age to life expectancy.

Thanks; I've actually played around with that before and found it informative.  One problem is that the numbers get worse every year the can is kicked down the road...and kicking the can is actually the very most politically viable option.

[PDXTabs]

I think it likely that they will find a way to change it around the perimeters at least before the trust fund is dry, and the pessimistic part of me is pretty confident I will be part of that perimeter.  Maybe it's FRA increases for younger people only, maybe it's means testing for wealthy people, maybe it's something that hits people with fewer working years, but somehow I'm sure something will come to bite me as it has with all recent government programs.

Here's a great interactive tool showing various tweaks that could be done to SS and the impact they would have. https://www.crfb.org/socialsecurityreformer/ My guess is that most politically viable options are raising (or eliminating) the cap on earnings subject to payroll taxes, and indexing retirement age to life expectancy.

Yes, this tool is great. If you:
1. Remove the income cap
2. Tax cafeteria plans
3. Increase rate by 1%
then you get more than enough revenue even if you raise the minimum benefit to 125% of the poverty line

I'm not sure that raising the retirement age again is politically viable. Some people can work until they are 70, but a lot can't.

[wageslave23]

A thought experiment:

Assuming that SS is primarily security net designed and is necessarily calculated around the assumption of average results...

Maximizing the value of SS for yourself is a matter of not being average.

One self explanatory way to do that is to live longer than average. Of course that isn't entirely within our own control, but this is MMM. Taking care of your health is step one and has a high probability of contributing to this outcome. The good* news on health is that beating the average in America isn't that much effort.

A second less common but very Mustachian strategy is to work less than average.  I'm self employed so very aware of paying both sides of SS. By my math, the value of my contributions has really fallen since getting to the the .32 inflection point. Working with your numbers which I didn't check against my own: Contributing 12k to SSN now gets me 1k a year for life in 25 starting in 25 years? I'll assume that SS is actually safer than the 4% rule and use 2.5% so 1k per year requires 40k invested 25 years from now. At historical average returns my 12k would have been worth at least 120k by then or 65k adjusted for inflation... Not sure if the 1k a year in your example was adjusted for inflation, either way it's not great. On the other hand extrapolating that to anyone contributing at .9 rate is getting a federally guaranteed ROI comparable to or better than the stock market with very little risk...

To me, that really is the point of SS. It's there so if we screw up our math, someone fails to plan for the future at all, or is truly financially unable to do so, we shouldn't be destitute in old age. If someone has managed to live on a small income all their life, getting 90% of it and medical coverage in retirement should allow them to stop working. The more we earn the more we're expected to plan for our own futures. Not choosing a normal maximum consumption life means I'll still come out ahead if I live an average number of years and do even better if I stay healthy. But I don't really begrudge the system the reduced return on my 12.4% because I like knowing there is a back up system is i mess something up.

*Actually this is sad, but it's good for this limited purpose.

Actually I think the guy that claims "disability" at 35 and collects for the next 50 yrs is ahead of the average.  Living an extra 5 or 10 yrs longer than the average person doesn't mean much compared to the person collecting almost their entire adult life.  Or people who die with a wife and 2 kids.  But I get your point. 

I think you need to use adjusted for inflation rate of return because the social security payments are adjusted for inflation and will be in the future.  Probably around 2% real rate of return is a fair number for comparison purposes.  Since ss is "guaranteed" you should probably use 0% real rate of return in your self investing alternative.  Risk free rate of return is right around inflation.

I can't in good conscious include claiming disability when I'm not as an option for beating the average so I didn't include it. :)

I agree that SS adjusts for inflation, I was just unclear if you had in you original example with each additional year of work adding 1k/yer to your SS. I will disagree that SS should be treated as no risk investment. It's an annuity that only pays out during my lifetime so unlike my 401k I can't designate who benefits should I pass early. There is another opportunity to maximize the payoff here by marrying someone who should live much longer than myself, but statistically I probably didn't...

I didn't mean to suggest that as a strategy for beating the average. I meant those people are the ones dragging the average down, more so than the person who pays in all their life and then collects for an extra 5 years longer than expected.

[coppertop]

I'm not sure that raising the retirement age again is politically viable. Some people can work until they are 70, but a lot can't.

Personally, I retired at age 62 and am now 67.  I can't imagine getting up and going to work every day at this point.  I get tired and have a lot of aches and pains that I never dreamed five years ago I would develop.  The people I know who have worked into their 80s and even beyond are either those who don't have enough resources OR those who are professionals and can decide on their own schedules and come and go as they please. 

[Must_ache]

When I run the numbers, it seems like I'm getting about the full value of my social security deduction paid back to me. If I haven't worked the full 35 years maximum, then assume I'm going to make $100k next year. This would raise my 35 yr avg by $3k. At the 32% bend point, I'm getting $1000 more in yearly benefits for earning that extra $100k. The future value of that $1k per year, I figure by using a 6% discount rate instead of the 4% rule since we are looking more at averages instead of worst case. So $1k divided by .06 equals $16k. On the $100k earned I'm paying $6200 into social security.  If I had invested that money for 30 yrs instead (at 3% real returns), I would be looking at roughly $15k. There's a lot of hand wavy math, but it seems like if you are a middle earner, you end up getting your money's worth from ss contributions.  If you also live 30yrs beyond 67.  Anyone want to check my calculations? I'd probably rather just keep my own money but definitely not as bad of a tax as I thought.

There are two bend points.  If you are making $100k per year for 34 or 35 years, your average indexed monthly earnings (AIME) would be either $8,095 or $8,333 depending on whether it was 34 years or 35 years.  In any case, anything in excess of $6,721 only gains you 15%, not 32%.  So the additional $238/mo AIME for working that extra year increases your monthly SS by $238 x 0.15 = $35.70.  On an annual basis that is $35.70 x 12 = $428.  Meanwhile the government collected 6.2% from you ($6,200) and the same amount from your employer.

Maybe the question you're wondering is, how will that marginal $428/yr (adjusted for inflation when you actually collect) compare with the additional $6,200 payment now to the government in exchange for it?

The SS website says at age 67 a male has a life expectancy of 18.6 years.  So you might expect to collect $428 x 18.6 = $7,961 but this amount is in the future and has to be discounted.  If I suppose the person here in this example is 60, they will on average collect between ages 67-85, the average age of collection there is 76 and we need to discount that back 16 years.  If I do that at 3%/yr we get $7,961 / 1.03^16 = $4,961.  That is less than the $6,200 you are paying in this year, so I'd say the government is coming out ahead. This example is simplistic and ideally we'd look at mortality tables and compute the expected value of a payment each year and discount back to today.

[Turtle]

I think it likely that they will find a way to change it around the perimeters at least before the trust fund is dry, and the pessimistic part of me is pretty confident I will be part of that perimeter.  Maybe it's FRA increases for younger people only, maybe it's means testing for wealthy people, maybe it's something that hits people with fewer working years, but somehow I'm sure something will come to bite me as it has with all recent government programs.

Here's a great interactive tool showing various tweaks that could be done to SS and the impact they would have. https://www.crfb.org/socialsecurityreformer/ My guess is that most politically viable options are raising (or eliminating) the cap on earnings subject to payroll taxes, and indexing retirement age to life expectancy.

Yes, this tool is great. If you:
1. Remove the income cap
2. Tax cafeteria plans
3. Increase rate by 1%
then you get more than enough revenue even if you raise the minimum benefit to 125% of the poverty line

I'm not sure that raising the retirement age again is politically viable. Some people can work until they are 70, but a lot can't.

One option I'd like to see discussed is a "donut hole" in removing the income cap.  In other words, have the limit remain, but only for a set window. For example, set it up so the tax resumes at 200K or 250K with no upper limit.  That gives a break to the (upper) middle class who are working hard, but adds a flat tax for the ultra high earners who would rather pay tax lawyers than support the infrastructure that helps to make them rich.

[PDXTabs]

I think it likely that they will find a way to change it around the perimeters at least before the trust fund is dry, and the pessimistic part of me is pretty confident I will be part of that perimeter.  Maybe it's FRA increases for younger people only, maybe it's means testing for wealthy people, maybe it's something that hits people with fewer working years, but somehow I'm sure something will come to bite me as it has with all recent government programs.

Here's a great interactive tool showing various tweaks that could be done to SS and the impact they would have. https://www.crfb.org/socialsecurityreformer/ My guess is that most politically viable options are raising (or eliminating) the cap on earnings subject to payroll taxes, and indexing retirement age to life expectancy.

Yes, this tool is great. If you:
1. Remove the income cap
2. Tax cafeteria plans
3. Increase rate by 1%
then you get more than enough revenue even if you raise the minimum benefit to 125% of the poverty line

I'm not sure that raising the retirement age again is politically viable. Some people can work until they are 70, but a lot can't.

One option I'd like to see discussed is a "donut hole" in removing the income cap.  In other words, have the limit remain, but only for a set window. For example, set it up so the tax resumes at 200K or 250K with no upper limit.  That gives a break to the (upper) middle class who are working hard, but adds a flat tax for the ultra high earners who would rather pay tax lawyers than support the infrastructure that helps to make them rich.

In 2022 you had to make at least $147k to hit the income cap. That's more than 91% of the population according to dqydj. But really you had to make more because health insurance and cafeteria plans aren't counted. Also all of you dividends and capital gains aren't counted. I'm not sure why making a carve out for the upper middle class makes any logical or political sense.

[Must_ache]

I'm not sure why making a carve out for the upper middle class makes any logical or political sense.

There is a maximum SS payout, so it stands to reason that a person should only be taxed up to a certain amount of his income. 

[rantk81]

I'm not sure why making a carve out for the upper middle class makes any logical or political sense.

There is a maximum SS payout, so it stands to reason that a person should only be taxed up to a certain amount of his income.

They could make a third "bend point" that drops the "rate of payment" from 15% to 1% or something...

[Turtle]

I was thinking more along the lines of a phased in approach.  Leave the limit at 200K and when the two numbers cross, no more donut.

I've never been in the range to get that break, but I know some folks who have barely gotten into that range.  They considered it to be a little year end bonus to help with holiday expenses. 

[wageslave23]

When I run the numbers, it seems like I'm getting about the full value of my social security deduction paid back to me. If I haven't worked the full 35 years maximum, then assume I'm going to make $100k next year. This would raise my 35 yr avg by $3k. At the 32% bend point, I'm getting $1000 more in yearly benefits for earning that extra $100k. The future value of that $1k per year, I figure by using a 6% discount rate instead of the 4% rule since we are looking more at averages instead of worst case. So $1k divided by .06 equals $16k. On the $100k earned I'm paying $6200 into social security.  If I had invested that money for 30 yrs instead (at 3% real returns), I would be looking at roughly $15k. There's a lot of hand wavy math, but it seems like if you are a middle earner, you end up getting your money's worth from ss contributions.  If you also live 30yrs beyond 67.  Anyone want to check my calculations? I'd probably rather just keep my own money but definitely not as bad of a tax as I thought.

There are two bend points.  If you are making $100k per year for 34 or 35 years, your average indexed monthly earnings (AIME) would be either $8,095 or $8,333 depending on whether it was 34 years or 35 years.  In any case, anything in excess of $6,721 only gains you 15%, not 32%.  So the additional $238/mo AIME for working that extra year increases your monthly SS by $238 x 0.15 = $35.70.  On an annual basis that is $35.70 x 12 = $428.  Meanwhile the government collected 6.2% from you ($6,200) and the same amount from your employer.

Maybe the question you're wondering is, how will that marginal $428/yr (adjusted for inflation when you actually collect) compare with the additional $6,200 payment now to the government in exchange for it?

The SS website says at age 67 a male has a life expectancy of 18.6 years.  So you might expect to collect $428 x 18.6 = $7,961 but this amount is in the future and has to be discounted.  If I suppose the person here in this example is 60, they will on average collect between ages 67-85, the average age of collection there is 76 and we need to discount that back 16 years.  If I do that at 3%/yr we get $7,961 / 1.03^16 = $4,961.  That is less than the $6,200 you are paying in this year, so I'd say the government is coming out ahead. This example is simplistic and ideally we'd look at mortality tables and compute the expected value of a payment each year and discount back to today.

I'm not working 35 yrs. That's why I said I'm in the 32% bend point range. I discounted the increase payout by 3% which is what I think the stock market will return after inflation because inflation is already included in future ss payments.

[mistymoney]

When I run the numbers, it seems like I'm getting about the full value of my social security deduction paid back to me. If I haven't worked the full 35 years maximum, then assume I'm going to make $100k next year. This would raise my 35 yr avg by $3k. At the 32% bend point, I'm getting $1000 more in yearly benefits for earning that extra $100k. The future value of that $1k per year, I figure by using a 6% discount rate instead of the 4% rule since we are looking more at averages instead of worst case. So $1k divided by .06 equals $16k. On the $100k earned I'm paying $6200 into social security.  If I had invested that money for 30 yrs instead (at 3% real returns), I would be looking at roughly $15k. There's a lot of hand wavy math, but it seems like if you are a middle earner, you end up getting your money's worth from ss contributions.  If you also live 30yrs beyond 67.  Anyone want to check my calculations? I'd probably rather just keep my own money but definitely not as bad of a tax as I thought.

There are two bend points.  If you are making $100k per year for 34 or 35 years, your average indexed monthly earnings (AIME) would be either $8,095 or $8,333 depending on whether it was 34 years or 35 years.  In any case, anything in excess of $6,721 only gains you 15%, not 32%.  So the additional $238/mo AIME for working that extra year increases your monthly SS by $238 x 0.15 = $35.70.  On an annual basis that is $35.70 x 12 = $428.  Meanwhile the government collected 6.2% from you ($6,200) and the same amount from your employer.

Maybe the question you're wondering is, how will that marginal $428/yr (adjusted for inflation when you actually collect) compare with the additional $6,200 payment now to the government in exchange for it?

The SS website says at age 67 a male has a life expectancy of 18.6 years.  So you might expect to collect $428 x 18.6 = $7,961 but this amount is in the future and has to be discounted.  If I suppose the person here in this example is 60, they will on average collect between ages 67-85, the average age of collection there is 76 and we need to discount that back 16 years.  If I do that at 3%/yr we get $7,961 / 1.03^16 = $4,961.  That is less than the $6,200 you are paying in this year, so I'd say the government is coming out ahead. This example is simplistic and ideally we'd look at mortality tables and compute the expected value of a payment each year and discount back to today.

I'm not working 35 yrs. That's why I said I'm in the 32% bend point range. I discounted the increase payout by 3% which is what I think the stock market will return after inflation because inflation is already included in future ss payments.

looks like you are definitely in the sweet spot for returns on ss contributions!

meanwhile - I'm not sure why mine is so low! I have done the 35 years, although a few of those are super low part time years while late teen/early 20's in school type work. So now I am replacing those with *big money!* years....I was just on the cusp of maxing SS payments on my salary in 2022....but it doesn't seem to be increasing my expected payout very much at all! Even looking at inflation adjusted numbers, 7 of those years are under 10k. I will be losing ground in 2023 as the max income for SS jumps 13k.....while my salary only went up 3k!

Hoping the inflation reconfig in the April SS statement will be super good news! Otherwise, I'm confused on the good SS benefit so many people report expecting on only 15 or so years of working.

[poxpower]

To me, that really is the point of SS. It's there so if we screw up our math, someone fails to plan for the future at all, or is truly financially unable to do so, we shouldn't be destitute in old age. If someone has managed to live on a small income all their life, getting 90% of it and medical coverage in retirement should allow them to stop working.

Ok we're on an island.
You're 65, I'm 30.
It's just the two of us. We forage and fish for sustenance.

You decide "Ok, I'm 65, time to retire. I worked my whole life on this Island, I'm entitled to not be destitute in my old age. You'll have to provide for me!".
I say "no, I can barely fend for myself as it is, you'll have to keep working".

You retort "You don't understand. I earned this. Because I said so."

What now?
Next morning I wake up with a gun pointed at my head and you saying I best start fishing because it's going to be a long day.

One day you die. I'm now 65, more worn then you ever were, having worked twice as much for decades. I finally grab the gun and point it at the ocean, yelling at the top of my lungs that I AM ENTITLED TO NOT BE DESTITUTE IN OLD AGE. But strangely not a single fish jumps out from the ocean to be grilled on the campfire.

[Tempname23]

 

Overall, sure, I'd rather have had the control of this money from the get-go.  I used to get up in arms about that.  Now, as someone firmly wedged in the 0.32 regime (and who likely won't hit 0.15 due to FIRE), it's more of a shrug of the shoulders.  Not in my circle of control, as MMM would say.  I'll take the money - optimized however I can - whatever it may be once that time comes.  Yes, I will get peeved if/when Congress reduces my benefit to fund the benefits of others, but I've self-insured enough so that it won't break me.

  There was a time when I thought I would be better off investing my FICA on my own, but I really don't know if that is true, and it depends on whether it is both halves or just my half. I was not a high income earner, but I was self employed for much of my life and did pay both halves for much of my life.
  When you throw in the additional benefits SS provides like a disability policy and the family benefits if I should die, and also the fact that our tax dollars would still need to be spent to support those that didn't save for their own future and are now destitute, I'm in favor of the program as being good for society.

I've come to very similar conclusions. I think my father's experience after he had a heart attack and had to stop doing construction really helped me see the value of the safety net. He was close to retirement age when it happened and so he didn't have to wait long to file. But without the heart attack I'm sure he would have worked several more years before taking SS. With no debt and a house that was his, he was able to live a simple but full life on his modest SS check. To be fair, growing approximately 3/4s of his vegetables, and me cutting most of his firewood to heat his house probably helped...

I was 18 when my dad at 43 had a severe heart attack, if it wasn't for SS disability, I would have had to support my parents and would not be in the good financial situation I'm in now.
 Over 49 years I paid in $116,535 and my employers paid in $14,898 for a total $131,433, I'll be collecting SS at 70 yrs old, (2 years from now) and expect between $38,000 and $39,500 a year, making me think I got a better than average deal.

[wageslave23]

To me, that really is the point of SS. It's there so if we screw up our math, someone fails to plan for the future at all, or is truly financially unable to do so, we shouldn't be destitute in old age. If someone has managed to live on a small income all their life, getting 90% of it and medical coverage in retirement should allow them to stop working.

Ok we're on an island.
You're 65, I'm 30.
It's just the two of us. We forage and fish for sustenance.

You decide "Ok, I'm 65, time to retire. I worked my whole life on this Island, I'm entitled to not be destitute in my old age. You'll have to provide for me!".
I say "no, I can barely fend for myself as it is, you'll have to keep working".

You retort "You don't understand. I earned this. Because I said so."

What now?
Next morning I wake up with a gun pointed at my head and you saying I best start fishing because it's going to be a long day.

One day you die. I'm now 65, more worn then you ever were, having worked twice as much for decades. I finally grab the gun and point it at the ocean, yelling at the top of my lungs that I AM ENTITLED TO NOT BE DESTITUTE IN OLD AGE. But strangely not a single fish jumps out from the ocean to be grilled on the campfire.

Hahaha. Expecting Something for nothing - the American way.

[Alternatepriorities]

To me, that really is the point of SS. It's there so if we screw up our math, someone fails to plan for the future at all, or is truly financially unable to do so, we shouldn't be destitute in old age. If someone has managed to live on a small income all their life, getting 90% of it and medical coverage in retirement should allow them to stop working.

Ok we're on an island.
You're 65, I'm 30.
It's just the two of us. We forage and fish for sustenance.

You decide "Ok, I'm 65, time to retire. I worked my whole life on this Island, I'm entitled to not be destitute in my old age. You'll have to provide for me!".
I say "no, I can barely fend for myself as it is, you'll have to keep working".

You retort "You don't understand. I earned this. Because I said so."

What now?
Next morning I wake up with a gun pointed at my head and you saying I best start fishing because it's going to be a long day.

One day you die. I'm now 65, more worn then you ever were, having worked twice as much for decades. I finally grab the gun and point it at the ocean, yelling at the top of my lungs that I AM ENTITLED TO NOT BE DESTITUTE IN OLD AGE. But strangely not a single fish jumps out from the ocean to be grilled on the campfire.

Hahaha. Expecting Something for nothing - the American way.

To make this gross over simplification slightly more accurate, the 30 year old is handed the best spear gun in the world and taught exactly where all the fish are by the 65 year old before retiring. It's not expecting something for nothing, the retiree paid into the system (both by contributing to SS and by building the infrastructure that makes us all much wealthier) for years before retiring. Of course, we FIRE types are screwing with the statistics the systems is based on and if enough people join us something will have to give.

[rantk81]

To make this gross over simplification slightly more accurate, the 30 year old is handed the best spear gun in the world and taught exactly where all the fish are by the 65 year old before retiring. It's not expecting something for nothing, the retiree paid into the system (both by contributing to SS and by building the infrastructure that makes us all much wealthier) for years before retiring. Of course, we FIRE types are screwing with the statistics the systems is based on and if enough people join us something will have to give.

The amount of people who are FIRE-minded are a tiny sliver of a percentage which has an imperceptible effect on the system as a whole.

[wageslave23]

To me, that really is the point of SS. It's there so if we screw up our math, someone fails to plan for the future at all, or is truly financially unable to do so, we shouldn't be destitute in old age. If someone has managed to live on a small income all their life, getting 90% of it and medical coverage in retirement should allow them to stop working.

Ok we're on an island.
You're 65, I'm 30.
It's just the two of us. We forage and fish for sustenance.

You decide "Ok, I'm 65, time to retire. I worked my whole life on this Island, I'm entitled to not be destitute in my old age. You'll have to provide for me!".
I say "no, I can barely fend for myself as it is, you'll have to keep working".

You retort "You don't understand. I earned this. Because I said so."

What now?
Next morning I wake up with a gun pointed at my head and you saying I best start fishing because it's going to be a long day.

One day you die. I'm now 65, more worn then you ever were, having worked twice as much for decades. I finally grab the gun and point it at the ocean, yelling at the top of my lungs that I AM ENTITLED TO NOT BE DESTITUTE IN OLD AGE. But strangely not a single fish jumps out from the ocean to be grilled on the campfire.

Hahaha. Expecting Something for nothing - the American way.

To make this gross over simplification slightly more accurate, the 30 year old is handed the best spear gun in the world and taught exactly where all the fish are by the 65 year old before retiring. It's not expecting something for nothing, the retiree paid into the system (both by contributing to SS and by building the infrastructure that makes us all much wealthier) for years before retiring. Of course, we FIRE types are screwing with the statistics the systems is based on and if enough people join us something will have to give.

I think this analogy is referring to the first retirees who paid nothing into the system, and retired off the contributions of the younger generations.  When initially implemented they should have said workers will start paying into a social security system that will start paying benefits to them when they retire according to how much they paid. Current retirees who had already retired or were about to retire should have received Jack, since they hadn't paid anything in. It's basically a pyramid scheme, instead of a forced savings account.

[clifp]

41 years old, and I will hit the 2nd bend point this fall.
Using all kinds of retirement simulators, if SS isn't changed to reduce my future benefits, I'd be pretty safely able to Fat-FIRE right now.

I don't think it is prudent to count on the whole value, as the congresscritters seem to always make the "younger" (e.g. people more than 15 years away from retirement) bear all of the pain when they make changes/cuts to benefits or increases to costs.  Additionally, the not-indexed-to-inflation thresholds for how much SS income is taxable will continue to diminish the value of the future benefits -- especially more-so now that inflation has ratcheted up.

I think it is probably prudent to assume my FRA will probably increase a few years.  I think it is also prudent to assume that the value of any future benefits would be about half of what would otherwise be projected under the current rules of the system.

I retired in 2000 at 40, at the time, for planning purposes, I cut my assumed SS in half, cause social security was "running out of money".  Now at 63, If I collected my benefits now I'd get $2250, if wait till 70, my plan, I'll get $3700.  My friend and his wife who basically max it out (35+ year, mostly maxing it out) and took at 70 is getting 4400., his wife gets almost as much, a combined $100K in social security ain't chump change.

It is not clear to me that social security is that much worse shape in 2023 that it was in 2000.

[Alternatepriorities]

To me, that really is the point of SS. It's there so if we screw up our math, someone fails to plan for the future at all, or is truly financially unable to do so, we shouldn't be destitute in old age. If someone has managed to live on a small income all their life, getting 90% of it and medical coverage in retirement should allow them to stop working.

Ok we're on an island.
You're 65, I'm 30.
It's just the two of us. We forage and fish for sustenance.

You decide "Ok, I'm 65, time to retire. I worked my whole life on this Island, I'm entitled to not be destitute in my old age. You'll have to provide for me!".
I say "no, I can barely fend for myself as it is, you'll have to keep working".

You retort "You don't understand. I earned this. Because I said so."

What now?
Next morning I wake up with a gun pointed at my head and you saying I best start fishing because it's going to be a long day.

One day you die. I'm now 65, more worn then you ever were, having worked twice as much for decades. I finally grab the gun and point it at the ocean, yelling at the top of my lungs that I AM ENTITLED TO NOT BE DESTITUTE IN OLD AGE. But strangely not a single fish jumps out from the ocean to be grilled on the campfire.

Hahaha. Expecting Something for nothing - the American way.

To make this gross over simplification slightly more accurate, the 30 year old is handed the best spear gun in the world and taught exactly where all the fish are by the 65 year old before retiring. It's not expecting something for nothing, the retiree paid into the system (both by contributing to SS and by building the infrastructure that makes us all much wealthier) for years before retiring. Of course, we FIRE types are screwing with the statistics the systems is based on and if enough people join us something will have to give.

I think this analogy is referring to the first retirees who paid nothing into the system, and retired off the contributions of the younger generations.  When initially implemented they should have said workers will start paying into a social security system that will start paying benefits to them when they retire according to how much they paid. Current retirees who had already retired or were about to retire should have received Jack, since they hadn't paid anything in. It's basically a pyramid scheme, instead of a forced savings account.

Fair, excet:

1) SS was created in 1935. A 100 year old retiree would have had to start working at 13 to avoid paying into SS at this point.
2) The people who did take out of the system without paying into it did still create an awful lot of the foundational infrastructure that we've all been building on ever since. Is anyone seriously going to argue that we're working harder than the men mining coal or building rail beds with a shovel?

I propose the reason SS is functioning like a pyramid scheme is simply that it's been politically expedient to kick the can down the road for as long as it we've know our demographics were not following the assumptions the actuaries made. It's the same reason state pension plans are underfunded. Politicians are generally rewarded for doing bad math that gives easy answers.

[PDXTabs]

I propose the reason SS is functioning like a pyramid scheme is simply that it's been politically expedient to kick the can down the road for as long as it we've know our demographics were not following the assumptions the actuaries made. It's the same reason state pension plans are underfunded. Politicians are generally rewarded for doing bad math that gives easy answers.

No, it's always been like that. The first SS recipient was Ida May Fuller who paid in $24.75 to get $22,888.92 in Social Security benefits.
https://www.ssa.gov/history/idapayroll.html

The program was designed to be pyramid scheme-esque with current workers paying for current retirees.