Are the baby boomers draining the Social Security Trust Fund leaving little for younger generations? Also, because there is a cap on earnings that can be taxed for Social Security are the “rich jot paying their fair share?” The maximum amount of taxable earnings is $118,500. These are commonly held beliefs – particularly on the left. Let’s do the math.
One can receive the maximum Social Security benefit if one takes the benefit at age 70. For many baby boomers it means that they have been paying the so-called payroll tax for 50 years. Social Security’s maximum benefit, currently $3,500 a month, equals $42,000 a year. And so, if someone is receiving the maximum benefit and lives to age 90, they will receive $840,000 worth of (inflation-adjusted) benefits.
[Source: My Sorry Social Security Return, By Jeremy J. Siegel (Footnote)]
For a person earning the maximum of $118,500 over 50 years, that person and their employer paid combined taxes equaling approximately $330,000. The benefits collected appear to substantially exceed the taxes paid (approximately 250% more).
However, typically one would not let those funds stand fallow. Had they been invested in a stock index fund they would have yielded approximately $2.3 million (or 270% more than the government benefit). Ah, but when this argument is used, the progressive/statist/ altruists throw back their two favorite counter arguments. Counter argument 1: People are stupid and must be forced to save (they must have read the ant and the grasshopper when they were children). Argument 2: The stock market could crash.
OK. The solution to counter argument 1 is to require contributions but allow those contributions to be invested as the individual sees fit, rather than the federal government. The solution to counter argument 2 is to offer Treasury bonds as one of the limited investments. After all, isn’t that what our government does with our “Social Security Trust Funds?” One would have accumulated $1.28 million if their “contributions” had been placed in U.S. Treasury bonds. Think about that for a moment. The government bought Treasury bonds with that tax money and, in effect, the government made almost one-half million dollars more on that person’s Social Security taxes than they will pay out (presuming that person lives another 20 years).
[Directly from the Siegel article] What about Medicare? Over the past half century, my Medicare taxes exceeded $1 million, more than three times my Social Security taxes. That’s because since 1994 there has been no cap on the income subject to Medicare taxes. I have calculated that these taxes, invested in Treasury bonds, would now have accumulated to almost $1.75 million.
I do not know the most expensive health-care coverage that I could buy at my age, but the so-called “Cadillac” coverage, upon which the government will apply a stiff surtax, is $10,200 a year. Even if I purchased super-premium, all-inclusive medical coverage that cost $20,000 or even $30,000 a year, I will never begin to make back the money that I paid the government to take care of my medical needs.
There’s another issue. As I continue to work, I will pay both Social Security and Medicare additional tens of thousands of dollars. I won’t get any extra benefits from these taxes.
So are affluent seniors making out like bandits? Not at all. The bandit is the federal government, which provides benefits that are millions of dollars short of what anyone whose earnings are at or above the tax cap easily could have accumulated on his own.
Lastly let me state that the “experiment” of privatizing “social security” has already been done in the real world. The “real world” even includes the United States of America. The results will surprise you.
Footnote: Mr. Siegel is a Professor of Finance at the University of Pennsylvania’s Wharton School. So, his calculations are likely spot on.