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Too Generous Yet Not

Richard Quinn

I JUST REVIEWED my Social Security earnings record. It brings back memories. For instance, it shows I earned $105 in 1959 when I was age 16 and working after school in the city library for 75 cents an hour. I’ve paid Social Security taxes every year since, though in 2020 they were based on earnings of just $2,333 and I was counted as self-employed. That darn blogging money.

Here’s something to put matters in perspective: Over 64 years, my employers and I have contributed $265,871 in payroll taxes. That’s a lot of money. But consider that, since I began collecting Social Security in 2008, it took just 9.4 years to get back that amount in benefits. If you consider my wife’s spousal benefit based on my earnings record, all the payroll tax payments were recouped in only 6.2 years.

At age 65, life expectancy is 17.9 years for men and 20.5 years for women. That suggests that Social Security is a pretty good deal for other retirees as well. But it also highlights why the system’s finances are so precarious. To make matters worse, there are currently 2.8 workers for each Social Security beneficiary, down from 5.1 in 1960. By 2035, there will be just 2.3 workers for each beneficiary. That means less people forking over payroll taxes to cover the cost of Social Security for me and other retirees.

Since my wife and I began receiving Social Security in 2008, our benefits have increased almost every year due to cost-of-living adjustments (COLAs). Medicare premium hikes have offset those increases somewhat and, indeed, my net annual benefit decreased during a couple of years.

In 2021, there have been calls for higher annual COLAs and even a guaranteed 3% annual increase, regardless of inflation. No doubt many retirees could use the extra cash. But will that matter if Congress continues to ignore the underfunding of Social Security and benefits are cut by 23% or so in a few years, when the Social Security trust fund is finally depleted and the system is financed almost solely with payroll taxes?

No, that 23% cut won’t actually happen. But it’ll be interesting to see how close to the brink politicians will go, as they struggle to avoid telling citizens that higher taxes are needed to keep the promises made decades ago. Maybe it’s no surprise that 23% of Gen Z and 26% of millennials believe theres little chance Social Security will be part of their retirement.

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When I discuss the value of Social Security relative to taxes paid, invariably some folks comment that—if they were given the taxes to invest—they could do much better and end up with a sizable pool of cash in lieu of a monthly Social Security check. For a savvy investor and a totally disciplined person who over 40 years encounters no adverse life events, like disability, divorce and job loss, I bet that’s possible. But for the other 99.99% of Americans, not so much.

Following Medicare’s enactment in 1965, I and other workers began paying Medicare payroll taxes the following year. Since then, my employer and I paid $195,797 in Medicare taxes. Again, it sounds like a lot of money—until you consider the health benefits paid on behalf of my wife and me in just the last two years. The confrontation in May 2019 between my wife’s eye and a baseball resulted in medical bills of well over $100,000 and still counting. Pre-2019 claims more than offset the other $95,000.

Despite the taxes paid by me and everyone else, the Medicare hospital trust fund is in poor shape. According to the trustees, the assets in the hospital trust fund are, by 2026, projected to be insufficient to cover the shortfall between spending and revenues. By contrast, the Medicare Part B trust fund is funded, in part, by the federal government’s general revenue and hence can’t go bust.

Despite the program’s huge spending, Medicare arguably offers woefully inadequate coverage. There’s no out-of-pocket spending limit, and potentially high deductibles and copayments. As a result, most beneficiaries purchase supplemental Medigap insurance. Indeed, for the average retiree, premiums for Medicare Part B, Part D and Medigap run around $400 a month. That’s quite a chunk out of the average Social Security check.

The bottom line: I understand why folks complain that Social Security benefits are too low and Medicare coverage is inadequate. Yet it also strikes me that Social Security and Medicare have delivered a good return on my payroll tax “investment”—perhaps too good, as evidenced by the shaky finances of both systems. Do we want benefits to continue as is and perhaps even get better? I’d like that. But I’d also like to know who’s going to foot the bill.

Richard Quinn blogs at QuinnsCommentary.com. Before retiring in 2010, Dick was a compensation and benefits executive. Follow him on Twitter @QuinnsComments and check out his earlier articles.

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Donny Hrubes
Donny Hrubes
4 months ago

Hello people,
I’ve never been much of a hair splitter looking at things with a spyglass. There’s so many different opinions here.
Well, I simply looked at a few of my numbers from the My Social Security web site and do feel really good about it.

I in my whole working life, paid in $139,036. That’s the cost to me and that’s all I’m interested in.
I waited till I received the ‘You better has gots to apply for benefits ’cause it don’t gonna get any bigger’ letter.
That’s 51 years of being in the pay mode and I’m 70.

Now, in my rationalization I’m more considering what the max payout can be and NOT how soon I will get my investment back. My retirement years should be free from want I feel and I know I did what I could to maximize my SS.
Anyway the calculator tells me it will take 3.4 years to get my investment returned which is a super ROI! But even if I live only another year, it’ll be a good year!
Now yes, there are monies that are paid from my SS check, but, they are paying for MY benefit and not some brokerage or investment company.

A fellow was chatting, a few years ago about a pension I also get from the job I retired from and he mentioned “How much money would you have to have in an account to pay out this amount for life?” meaning the pension was a good deal.

Well, I know how much I paid into my SS account and can figure what percentage return I would need to match the yearly payout.
%29.35 per year.

David Lamb
David Lamb
4 months ago

Where does inflation come into this? My working career began in 1976, so I started then:

“$1 in 1976 is equivalent in purchasing power to about $4.77 today, an increase of $3.77 over 45 years. The dollar had an average inflation rate of 3.54% per year between 1976 and today, producing a cumulative price increase of 377.50%. This means that today’s prices are 4.77 times higher than average prices since 1976, according to the Bureau of Labor Statistics consumer price index. A dollar today only buys 20.96% of what it could buy back then.”

This means that our current SS benefit dollars have far less purchasing power than the dollars we and our employers contributed through our working careers. Allowing for inflation may not ultimately alter the conclusion that “Social Security and Medicare have delivered a good return on my payroll tax “investment” ” but it would certainly change the 6.2 year recovery period stated above.

David Lamb
David Lamb
4 months ago

I am in the small minority who is not at all sure that 23% SS benefit cut won’t happen. The only way to avoid it is with higher taxes, and I doubt Congress has the political courage to go that route. (Yes, there are many seniors collecting SS benefits who vote and will remember if their Federal representatives failed to act to preseve their SS benefits, but there are even more on the other side of that coin.) More fundamentally, Congress may not have the economic ability to raise taxes: taxes are economically depressing, and Congress is desperate to avoid anything that stifles economic growth and jobs creation; witness “stimulus” during these pandemic times. Or if tax increases are on the table, perhaps reducing the current annual Federal deficit and / or total accumulated Federal debt will be perceived as even higher priorities than preserving SS benefits. For those reasons, Congress may turn to indirect SS benefit reductions: increased means testing, taxation of 100% of SS benefits rather than “just” 85%, wealth testing (all of us savers and planners who did the right things will get the short end of that stick), etc.

Kurt S
Kurt S
4 months ago

Social Security is meant to be a supplement to retirement. An insurance policy so you are not totally destitute if you didn’t plan properly for retirement. It is not a full retirement plan. I don’t see Social Security being cut. I do see the COLAs not keeping up with inflation. So you still get paid. The money will not buy as many goods and services over time.

BenefitJack
BenefitJack
4 months ago

Yes, Social Security and Medicare are a great value – for some. Probably not for many of the readers of this article.

I’m always amazed when people think Medicare (and a supplement) is so expensive, in terms of what they pay for premiums, and out of pocket costs – how it is “woefully inadequate” coverage. Can you tell me the annual cost of Medicare, per person?

Here you go: Part A: $5,652, Part B: $7,128, Part D: $1,587 (national average cost), Medigap (my age, in Ohio, AARP): $2,145, Total: $16,511.

For a couple: $33,022!

And, don’t forget, your FICA-Med taxes only fund Medicare Part A – the Hospital Insurance Trust Fund. The inadequate funding continues even though we’ve added new taxes – for example, in 1993, the wage cap on Medicare Part A taxes was eliminated, and in 2010, we added income surcharges and new taxes on investment income as part of the Patient Protection and Affordable Care Act of 2010 (Health Reform).

Did you know that approximately 75% of Medicare Part B and D is funded with (general revenue taxpayer dollars – mostly income taxes). So, the lifetime FICA and FICA-Med taxes on your Social Security statement (mine too!) are but a modest part of the taxes most of us have paid during our working careers – assuming you (like me) have consistently been part of the group of income tax paying Americans. Today, less than 3% of income tax revenue comes from American taxpayers at the median income level of below. And, that is nothing new. Back in back in 1980, only about 10% of income tax revenue came from the lower earning half of Americans who filed income tax returns.

Then, of course, for those who have saved and prepared for retirement, there are the IRMAA surcharges for Part B and Part D – which could be as much as $505 (Part B) and $77 (Part D) – per person, per month. And, the hit could be significant for an older surviving spouse where both individuals earned a pension benefit, saved a lot subject to the required minimum distribution rules (see Ed Slott, the new retirement savings tax time bomb), where each elected a 100% J&S annuity.

Remember that Social Security benefits are heavily skewed in favor of lower income individuals who are married. That is the benefits are hyper-progressive as to income – having significant, disproportionate value to married wage earners who had gaps in their working careers or those with consistently low wages. Keep that in mind when folks suggest raising the cap on wages to offset chronic underfunding.

With respect to Medicare you can’t forget Medicaid for the dual eligible – one out of every five Medicare beneficiaries is dual eligible (income up to 100% of the Federal Poverty Level, limits on assets (exclusions for certain assets). Combined, the health benefits are very progressive. Someone reaching age 65 today could qualify for non-contributory Medicare Part A, Part B and Part D coverage, as well as no Medicare point of purchase cost sharing (deductibles, etc.) after paying as little as $132.16 in FICA-Med taxes (working from age 20 to age 30, 1976 – 1985, 40 quarters of coverage at the tax rates then in effect).

Most economists agree that the employer-paid taxes are actually foregone wages. And, of course, don’t forget that your FICA and FICA-Med taxes were paid with after-tax dollars – so, yes, you paid federal and state income taxes (where applicable) on your income before FICA and FICA-Med were deducted. Keep that in mind when they tax you on up to 85% of your Social Security benefit.

And, don’t forget to adjust all the taxes you paid, FICA, FICA-Med and federal income taxes, for Dick and others who posted here all the way back to the 1960’s, for the investment earnings foregone. Yes, you earned them – just as if you had your taxes invested in a retirement savings plan. And, no, I wouldn’t use the actual earnings based on trust fund investments (which are constrained by law) and yes I would count the income taxes you paid to fund Medicare benefits. I would use a market return – even say a 60/40 allocation – to measure what you sacrificed to fund Social Security, Medicare AND Medicaid.

Finally, the story is different, of course, for those who died prematurely – varying wildly between those who left behind a spouse and minor children and those who died unmarried without dependents (where the only payment at death was, is and continues to be $255). Social Security and Medicare are also $0 for a divorced spouse trying to claim on the ex’s record unless they were married 10 years or more (median duration of first marriages that end in divorce = 8 years, median duration of second marriages that end in divorce = 7 years).

Yes, Social Security and Medicare are a good buy for many, a great buy for some, but not so much for others. And the past is not predictive of the future as we, as a society, have not paid enough in taxes to fund the promises Congress made to current beneficiaries.

David Lamb
David Lamb
4 months ago
Reply to  BenefitJack

Can you please clarify “the annual cost of Medicare, per person? Here you go: Part A: $5,652, Part B: $7,128, Part D: $1,587 (national average cost), Medigap (my age, in Ohio, AARP): $2,145, Total: $16,511.” Cost to whom? I’m on Medicare and am not paying that. Thanks.

Jack Towarnicky
Jack Towarnicky
4 months ago
Reply to  David Lamb

The Medicare Part A premium is the cost that would be assessed as if an individual never paid FICA-Med payroll taxes (most fund this by paying 40 quarters of FICA-Med taxes). The Part B premium is 4 times the amount most pay for Medicare Part B (our premium is set at ~25% of the estimated cost of coverage – the rest is paid by taxpayers as part of general revenue … mostly income taxes). Part D is funded much the same as Part B (our premium is set at ~25% of the estimated cost of coverage, the rest is paid by taxpayers as part of general revenue). The AARP quote for a “F” plan was off of their website. This stuff ain’t cheap.

As mentioned in my post, the financial burden is allocated to three groups:
(1) Those paying FICA-Med taxes (1.45% paid by the individual, 1.45% paid by their employer (often in the form of reduced wages to the worker),
(2) The current beneficiaries paying their monthly premiums for Part B and Part D coverage (except for the dual eligibles, where those costs are paid by taxpayers), while some beneficiaries pay IRMAA surcharges, and
(3) The 53% or so of American households who pay income taxes.

In 2026 (or earlier), we will likely see a change in the allocation once the HI trust fund is exhausted.

For Social Security, the financial burden is allocated approximately 80% to current workers, and approximately 20% or so to those of us who built the trust fund with our taxes (which exceeded the benefits paid) over the period 1984 to today. Starting in 2020 (I think), the payments will exceed taxes and we have started to draw wodn Social Security trust monies (almost $3 Trillion in assets). That draw down will accelerate as more Baby Boomers age into retirement. Trust assets are expected to be exhausted in the early 2030’s. Without change, payroll taxes are approximately enough to pay about 75% – 80% of the promised benefit.

Charlie Warner Jr
Charlie Warner Jr
4 months ago

Interesting read and it stimulated me to look back into SS records. In 1969 I paid SS tax on $689 I earned at Burger King, If my memory is correct I was making a 1.15 hour. Minimum wage was actually 1.60 hour, however restaurants were not required to adhere to this standard. My dream was to find a job paying 1.60. I worked at Burger King for three years. Fortunately it was not a like time wage, it was an entry wage. I leaned so much, as I reflect back perhaps my real gains were not income and would be more accurately measured from from what I learned. Customer service, getting along with others, team work, work ethic, managing finances…..and the list is endless.
So back to your point Richard, 6 years of receiving SS I have recouped over 1/2 of the combined total paid. While I did an ok job planning for retirement I did not fully understand IRMAA and how it could elevate (our) Medicare premiums. Not complaining, I have been more than blessed.

Roboticus Aquarius
Roboticus Aquarius
4 months ago

Good Article. I recently came across a study suggesting that the ‘average’ SS recipient covers about 2/3 of their SS payouts (with many caveats.)

For retirement I’ve been assuming about 70% of my promised payouts. I suspect that we will all get the full payment, but as you note we’re still waiting for Congress to do something about it.

The thing about medicare is it’s far from free. I was pretty shocked when I had our future medical costs analyzed. Once my wife and I drop our private insurance, and start paying for Part B and Part D premiums, plus misc expenses, we’re talking about $12K per person per year. $24K combined seems like it may be a bit high based on several on-line sources, but it seems likely (?) we’ll be paying at least $15K combined, and maybe $24K. (I appreciate any thoughts from folks who have delved further into this than I have. Maybe our income assumptions were high; I know the rates are somewhat need based.)

In any case, it’s a good thing I am not someone who needs security. The data surrounding retirement is so incredibly variable that our ranges for income and expenses are +/- 30%, making any attempt to nail down expectations a sisyphean effort.

Roboticus Aquarius
Roboticus Aquarius
4 months ago
Reply to  parkslope

Thanks, that’s good info! Clearly medicare costs will depend a lot on our income amounts and sources, so to some degree I can scale medical expenses with income assumptions.

R Quinn
R Quinn
4 months ago

The largest variable you will face is the IRMAA income based premiums. As I mentioned the basic premiums for Parts B and D plus Medicare coverage are around $400 a month per person (with variations by location and the Medigap or Medicare Advantage plan you take. If your retirement MAGI family income is at least $176,000 add about $71.70 to the $400. So, round it all up and $12,000 per year for two is not unreasonable and of course, higher for a higher MAGI. Another variable is out of pocket costs for prescription drugs which depends on the plan selected and the drugs taken.

Ormode
Ormode
4 months ago
Reply to  R Quinn

For couples, the IRMAA limits are pretty generous – how many retired couples have a MAGI over $176K, which will soon be $200K after a few more years of adjustment for inflation.
However, it’s only $88K for singles, which is far more likely to be a problem. Yeah, it’s only $70 more a month, but it’s annoying.

Roboticus Aquarius
Roboticus Aquarius
4 months ago
Reply to  R Quinn

Thanks, that helps with the conceptualization.

Mik Cajon
Mik Cajon
4 months ago

Please don’t stop asking the right questions …you have my vote.

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