Social Security: Will You Get Your Money's Worth?

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Hundreds of millions of Americans have paid into the Social Security system since it began, and several generations of retirees have counted on Social Security as a major means of financial support during their retired years. Given that everyone who works outside the public sector has to pay Social Security taxes on their wages, it's only natural to ask whether Social Security is actually a good deal for Americans. With potentially huge lifetime returns available from investing money in your early career, some believe that Social Security does a poor job of effectively having you set aside money now in exchange for the hope of larger benefits later.

Last year, the Social Security Administration's Office of the Chief Actuary issued its report on what it calls the "money's worth" ratios under the retirement portion of Social Security. Its findings confirmed that, when it comes to Social Security and whether it's worth it from an investment standpoint, a lot depends on when you were born, and how much you earn.

Higher taxes mean less payoff for future retireesUnquestionably, those who retired in the 1980s and 1990s got a better deal from Social Security than those who are retiring now, or will do so in the future. The reason is simple: The payroll tax rates that workers used to pay were much lower than they have been during the past 20 years, and those older workers spent much more of their careers having a smaller percentage of their wages taken out of their paychecks. As a result, nearly all recipients in that era got far more in benefits than they paid in taxes.

By contrast, Social Security taxes have been at their current 6.2% level for nearly 25 years, and most of those who are in their 40s or younger now have had that larger amount taken from their pay throughout their careers. Many of them will receive less in benefits than they paid in taxes, once you account for the time value of money.

Data Source: SSA.

The SSA report shows just how large an impact this effect has on Social Security recipients across generations. For those who reached age 65 in 2008, and had average earnings during their careers, the lifetime value of the benefits they can expect to earn is just half what those who retired in 1985 received. The disparities are even higher for those at the upper end of the income scale, as higher taxes had an even greater impact on high-wage earners once payroll tax rates rose.

Higher life expectancies make Social Security a better deal for women and the youngLooking forward, though, longer life expectancies for younger Americans offset some of the impact of higher taxes. Because Social Security payments are made for life, the longer you live, the bigger the payoff you get. That phenomenon also helped women compared to men, because women's life expectancies are longer than men's.

Source: SSA.

As an example, single men who turned 65 in 2008, and who earned average wages during their careers, can expect to get roughly $0.71 on a present-value basis for every $1 they paid in Social Security taxes. But for those born 30 years later, the corresponding "Social Security: Will You Get Your Money's Worth?"figure goes up to $0.92, because today's 40-year-olds. on average. will live to be older and collect benefits during a longer period of time. Similarly, single women who turned 65 in 2008 will get about $0.80 on the dollar in benefits.

How earnings affect whether Social Security is worth itSocial Security is a progressive system: Low-income earners have a larger percentage of their average income paid in benefits than high-income earners. As a result, the SSA report found that the more money you make, the less in benefits you'll receive compared to the taxes you paid.

Source: SSA.

For instance, among those who reached 65 in 2014, single males who earned the maximum covered under Social Security can expect to receive about half of the present value of the taxes they paid in the form of benefits, and two-earner couples will get benefits with a present value of about 56% of their taxes paid. For those in the SSA's very-low-income category, though, single men will get about a third more in benefits than the value of the taxes they paid, and two-earner couples can expect to get more than a 50% increase.

The big payoff goes to single-earner married couplesBy far, the biggest benefits under Social Security go to married couples that only had one working spouse. The chart below takes figures for those who turned 65 this year, and compares various married couples depending on whether one spouse or both spouses worked. As you can see, the disparities are huge regardless of income level.

Data source: SSA.

It's easy to understand why one-earner couples get such a huge advantage with Social Security: Even spouses who contributed nothing in Social Security taxes receive substantial spousal benefits and survivors benefits that, in many cases, are exactly the same that their two-earner counterparts receive. Put another way, because of the benefits one can receive based on a spouse's work history, many lower-earning spouses end up completely wasting their Social Security tax payments.

Social Security wasn't designed to be an investment vehicle for retirees; instead, it had the goal of providing at least a modest supplement to retirees' incomes. Since its inception, though, Social Security has become a lot more than just a supplement for many Americans. Policymakers need to keep the rising importance of Social Security in mind as they evaluate potential legislative changes that could have an even larger impact on whether Social Security is worth it for current and future recipients.

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