Social Security Part 1 - Work Less, Get More!

Let's say you are a very hard worker and you manage to earn $106,800 this year (which happens to be the limit for Social Security) you pay 6.2% of your income in Social Security tax ($6,621.60).  On the other hand, someone else works part time (leaving them with plenty of free, enjoyable time) and only earns $9,132 for the year.  They also pay Social Security tax of 6.2% on their income which is $566.18.  Let's assume that both individuals work at the same amount, adjusted for inflation, during the 35 years of their working lives.  Did you know that when it comes time for retirement, the lesser-working person will receive Social Security payments of around $8,218.8/year - about 14.5 times the amount they paid each year in tax - and the harder-working person will receive payments of about $30,672/year - only about 4.6 times the amount that they paid each year in tax?  To put it another way, the lesser-working person gets more than three times the amount of benefit from each dollar of Social Security taxes they pay than the harder working person does!

This is Part 1 of a 2-part series on Social Security.  In Part 1, we will take a look at how the harder you work, the less you get from Social Security.  In Part 2, we will take a look how your "return" on your Social Security "investment" compares with what you could get in the market.


For the sake of this article, we are going to assume that Social Security taxes will remain the same and Social Security (SS) will also pay benefits at the rate it currently promises.  Of course we know that this is a mathematical impossibility, but bear with me.

The primary reason for the factor of 3+ times disparity of SS benefit between the two workers is that SS gives lesser-working workers far more credit for working when determining its benefit formula.  AS you can see from this website and this website, the main calculation of SS benefits relies on determining your Primary Insurance Amount (PIA).  Here's SS's own website for how the PIA is determined:

For an individual who first becomes eligible for old-age insurance benefits or disability insurance benefits in 2010, or who dies in 2010 before becoming eligible for benefits, his/her PIA will be the sum of:

(a) 90 percent of the first $761 of his/her average indexed monthly earnings [MP: $761/mo = $9,132/year], plus

(b) 32 percent of his/her average indexed monthly earnings over $761 and through $4,586 [MP:$4,586/mo = 55,032/year], plus

(c) 15 percent of his/her average indexed monthly earnings over $4,586.[MP: up to the current SS maximum of $106,800/year]

To put it another way, for the first $9K of work you do a year, they credit you with 90 cents on the dollar, but that drops to 32 cents on the dollar from 9K to 55K and then drops further to 15 cents on the dollar for 55K to 107K.  Oh, they still take the same percentage of taxes from you, all right (6.2%) - they just don't give you the same benefit for the taxes that you pay.  In fact, they give 6 times the credit towards your benefit for dollars taxed below 9K than they do for dollars taxes from 55K-107K

Another way of thinking about it is when we compare the two cases, the lesser working person pays only $566.18/$6,621.60 = 8.5% as much taxes as the harder working person, but gets $8,218.8/$30,672 = 26.8% as much payment.  That is, their benefit per dollar of tax paid is 8.5/26.8=3.15 times greater than the hard working person.

So where does that leave us?
1) I am not in favor of the current Social Security pyramid scheme that is absolutely mathematically unable to pay the benefits that it is currently promising to people.  I think that the lie is shameful - and frankly ridiculous and detracts from governmental credibility.
2) Any old-age pension system should have the funds set aside - out of the irresponsible reach of government - and should offer equal benefits for each dollar contributed/taxed for all citizens.  You want to limit the dollars that you can contribute/be taxed out of?  That's fine with me, but stop discriminating against those that work hard.  Every dollar should earn the same. 
3) In a larger sense, I certainly agree that we don't want destitute people falling down in the streets and I really don't have an objection to an enforced retirement savings program that is fair for all citizens and provides a good return for its participants.  However, fairness is important - America was founded on a principle of equality for all citizens. 

As for good return, in Part 2 we will take a look at the actual performance of the Social Security system as compared to market performance.  That is, assuming that someone invested an amount equal to the Social Security tax every year for 35 years and then bought an inflation-protected annuity with the proceeds, would it be a better or worse deal than what Social Security currently provides?