In many ways, Social Security is an undervalued asset. Spouses benefit even if they never worked for pay. Kids benefit if a parent dies. The disabled get paid for life. Above all, Social Security provides lifetime income in retirement—an increasingly rare component of today’s patchwork retirement system.
But it is now official: Social Security is a lousy investment for the average worker. People retiring today will be among the first generation of workers to pay more in Social Security taxes than they receive in benefits over the course of their lives, according to a new analysis by the Associated Press.
Looking at numbers from an Urban Institute study, the AP found that a married couple retiring in 2011 after both spouses earned average income during their lives paid total Social Security taxes of $598,000. They can expect to collect $556,000 in benefits, if the man lives to 82 and the woman lives to 85. This is another landmark turning point sure to enliven the debate over how to fix Social Security, which without changes will be insolvent by 2033.
Another look at Urban Institute numbers suggests that the average working family still enjoys a positive return when factoring in Medicare benefits. And plenty of workers will continue to enjoy a positive return on their lifetime Social Security tax payments—women more than men because they live longer, among other factors. And because benefits are progressive, low-income workers will continue to receive a positive return. For high-income workers the return went negative two decades ago.
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The possibility of a negative return was never contemplated when Social Security started making regular payments in 1940. Then, payroll taxes were low and benefits were robust, and people didn’t live so long in retirement. With 42 workers per retiree, there was plenty of cash flowing into the program. So it was that the first Social Security recipient, Ida May Fuller, was able to collect $22,888.92 in lifetime benefits after paying a mere $24.75 into the system during her working years.
By 1960, there were still 4.9 workers paying into the system for every beneficiary collecting—and the typical family could expect to collect seven times what they paid into the system. But as the number of retirees began to grow and life spans expanded the strain became apparent. Still, as recently as 1985 workers across the board could expect a positive return on the tax.
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But today there are just 2.8 workers per Social Security recipient and that number will fall to 1.9 by 2035, according to the Congressional Budget Office. People no longer routinely die at 65 but live well into their 80s. To compensate, payroll taxes that were just 2% in the 1940s have risen to 12.4% today (half paid by your employer), which is another reason that you stand to collect less than you paid.
What can you do about the negative return? Live longer, for one thing. Social Security payments continue until you die. Lose weight. Stop smoking. Exercise. You’ll get more than just a better return on your tax dollars; you’ll save on medical costs, too. And don’t take Social Security benefits before age 70, if you are in good health and can afford to wait. Every year you delay, your monthly benefit rises by 8%, giving you a good shot at an even bigger lifetime payout.
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