Readers Write: The truth about Social Security – 100% return

The Island Now

President Trump wants to eliminate payroll taxes, including Social Security, and as justification he states that the weekly deduction for such tax is better in the pockets of people rather than in the hands of the government, especially during the current hard times.

Employees who earn money, whether on wages or by other compensation, are subject to payroll taxes that include Social Security. That tax, which we will refer to as a Social Security tax, is 6.2 percent, up to a maximum of $ 137,700. Let’s assume the wages fall into one of three categories and how much tax they would have to pay is shown in the following schedule:

The chart below shows the salary and Social Security tax on a weekly and yearly basis for the three categories.

   Salary                                Social Security Tax @ 6.2%

Annual          Weekly              Yearly   Weekly

$   52,000        $ 1,000            $3,224      $62

$   78,000        $ 1,500            $4,836      $93

$ 104,000        $ 2,000            $6,448      $124

For the moment, let’s switch to the back end, that is the amount of Social Security benefit the retiree will receive beginning at Full Retirement Age. For this example, age 65 will be used as the Full Retirement Age. The following is the current average and maximum benefit for 2020:

The average benefit amount for 2020 is $ 1,514 per month, for a yearly total of $18,168.

The average maximum benefit amount for 2020 is $ 2,857 per month for a yearly total of $34,284.

For many people, the above Social Security benefit allows them to survive.

But let me get to the fact that no one really focuses on. If you save money and fear risk, you put it in a bank, in a regular account or a certificate of deposit that might have an interest rate of 2 percent. If you prefer to invest in stocks, let’s roll it, baby.

In the above example, earning $52,000, $ 78,000 or $ 104,000, respectively results in a yearly Social Security tax of $3,224, $ 4,836 or $ 6,448. If you started working at age 21 and retired at age 65, approximating 45 years, the total that you would have paid in for Social Security would have been for the three categories $145,080, $217,620 or $290,160 respectively. That’s some chunk of change that the government is taking from you.

But wait. We’re missing something. For every dollar that the employee pays for Social Security tax, it’s a fact that the employer matches that amount. Therefore, whether you pay $3,224 or $4,836 or $6,448 for the year, your employer matches it. Remember, that amount goes into a fund that is maintained by the government for your benefit to pay for your future Social Security benefit. The government is merely holding money for you that is yours, to be paid back to you in later years as a Social Security benefit. Therefore, it is not an entitlement. To repeat it is your money!

If we focus on the lowest earning level category of $52,000 per year, it shows that the total you would have invested over 45 years is $145,080. Adding the employer’s matching total of $145,080 doubles the amount accumulated for your account, thus bringing your account total up to $290,160. Therefore, in reality, it’s like doubling your money or receiving an interest rate of 100 percent. Every year you put in $3,224 and that amount is matched.

However, there could be a downside. These days, living beyond 82 or 83 is a reality for many. If your account balance is $290,160, how long would it take for you to collect that money from the age of 65 on, considering your yearly average benefit would be $18,168 as shown above? By simple division, that comes out to almost 16 years. Therefore, if you live 16 years beyond age 65, you win. If not, you lose. For the highest earners’ category shown, living almost 17 years beyond age 65, you win. But, you should have realized the above calculation needs an adjustment. Remember – half of that money you’re getting back was not put in by you. Therefore, living eight or nine years beyond age 65 makes you a winner. And, that rate of return of 100% is not bad.

For a bit of history, it was President Franklin D. Roosevelt who proposed a program in which people contributed to their own future economic security by contributing a portion of their work income through payroll tax deductions. The Social Security Act was signed into law on Aug. 14, 1935, with amendments made in later years. Thank you, President Franklin D. Roosevelt.

Alvin Goldberg

Great Neck

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