Staring at my wife’s annual tax documents this weekend, I couldn’t help getting fired up over what she paid into Social Security last year.
When I pointed out the money sunk into the entitlement program — a 6.2% haircut on her modest salary — she simply shrugged. And when I asked whether she thought she would ever see that money again, she just shrugged again.
I love my wife because she is so temperate. But she’s also not much of a planner. What if I get hit by a bus tomorrow? What if we suffer another market meltdown and her 401(k) plan goes up in smoke? Would this so-called social insurance actually provide for her if she had no other option, or would she be better off if the government just stopped taking its 6.2% and left her the heck alone?
There had to be a point where an individual could better provide for himself or herself than Social Security would. So using my wife’s income and payroll taxes as a case study, I set out to find it.
I did. But where it was surprised me, not only by proving how well Social Security works in its current form, but how it will even work well in a diminished form should our politicians fail to act.
Uncle Sam can keep our Social Security taxes
For starters, let me share some figures with you from my wife’s W-2:
A 30-year-old copy editor at a small newspaper in Annapolis, Md., my wife made $37,638 last year. At a 6.2% rate, she paid $2,333.56 in Social Security taxes in 2010. In her working life, she has paid a total of $12,955 into the program, according to her annual statement from the Social Security Administration.
As estimated by the SSA, if she continued working and paying taxes at this rate, her benefits would be $1,440 a month at her “normal” retirement age of 67. That’s $17,280 a year. For the record, a worker can opt in earlier or later than 67 and receive either smaller or larger payouts, but for simplicity sake I’m sticking to this “normal” age and disbursement figure.
So at 6.2% a paycheck, at retirement (that’s 37 years from now), my wife would have paid $86,341.72 into Social Security. Throw in the cash she’s paid in so far and you get a grand total of $99,296.72.
Those are real dollars, according to the SSA — and nearly a hundred grand is hardly chump change. But if you divide this total by the yearly benefits, it only equals 5.7 years of Social Security payouts at the “normal” rate — or until my wife is a few months shy of 73. That’s well short of the 78.4-year life expectancy in the U.S.
So Social Security is a better way to provide for her — or, put in a more morbid way, if she doesn’t die before 74, she comes out ahead.
But who would just stick a hundred grand in the sock drawer? Anyone in their right mind would put that money to work.
Keep reading for more on Social Security taxes and investing…