Is Social Security a Rip-Off?

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 “WHERE DID THAT MONEY GO?”

Rick Kahler MS CFP

By Rick Kahler MS CFP http://www.KahlerFinancial.com

A reader recently forwarded me an email that began, “Who died before they collected Social Security?” It asked how many people only collected a small portion of what they paid into Social Security because they, or a spouse, died soon after retiring. Then it screamed in all caps, “WHERE DID THAT MONEY GO?”

Introduction

The rest of the piece, after calculations of how much an average person pays into Social Security, suggested the government is short-changing those who die before they receive back in benefits everything they paid in. It claimed that Social Security premiums were to have been put in a “locked box,” that instead they were loaned to the US Treasury, and that Social Security is therefore running out of money.

The many misstatements and errors in this piece highlight a common misunderstanding about the Social Security insurance program. It is not an income tax. Nor; is it actually insurance – or an investment!

Example:

If you earn a salary, you are familiar with the FICA (Federal Insurance Contributions Act) tax that, like federal income tax, is withheld from your paycheck. Everyone must pay it on their first $118,500 of earned income. The current rate for employees is 7.65% (6.2% for Social Security and 1.45% for Medicare), an amount matched by employers. The self-employed pay 15.3%.

FICA payments are not an income tax, but are insurance premiums used to fund the Social Security program. It is a direct transfer program, meaning the money coming into the plan is immediately paid out to retired or disabled participants. The proceeds are not directly deposited to the general account to be spent however Congress wishes.

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train station

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The Tipping Point?

However, in the past, because more money came into Social Security than was paid out in benefits, the program did loan the excess to the US Treasury Department (receiving bonds in return) to fund the operating expenses of the federal government. The program built up a significant investment in US Treasuries until 2010, when it began paying more out in benefits than it receives from participants. The program is now beginning to redeem the bonds. Officials project that in 2033 the program will have depleted the investment in bonds and will need to either adjust benefits, raise the payroll tax, or borrow from the US Treasury.

What it’s not?

  • Social Security isn’t insurance in the sense that insurance pays only when a person suffers a loss. With Social Security, everyone who has worked for more than 10 years will collect a monthly income upon retirement.
  • SS is also not a savings account or a retirement plan like an IRA or a 401(k). It is not set aside in a segregated account with your name on it. The money you pay in doesn’t accumulate or earn interest. If Social Security were designed as a retirement plan that would refund what participants pay in, plus some type of return, the payroll tax would far surpass 15.3%.

What it is?

So if Social Security isn’t an income tax, an insurance plan, or a retirement plan, what is it? It’s an annuity. Participants are guaranteed a monthly income for life; a lesser amount if they retire at age 62 or a higher amount if they wait until full retirement age or later.

Like any annuity, when you die the payments stop. The amount of the payroll tax/premium incorporates actuarial estimates of how many people will die before the average mortality age or live long past it. The money paid in by people who die early is not “missing.”

Assessment

If you have questions about Social Security, you can find detailed information at www.socialsecurity.gov. It’s a much more reliable source than anonymous forwarded emails.

Conclusion

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OUR OTHER PRINT BOOKS AND RELATED INFORMATION SOURCES:

Risk Management, Liability Insurance, and Asset Protection Strategies for Doctors and Advisors: Best Practices from Leading Consultants and Certified Medical Planners™8Comprehensive Financial Planning Strategies for Doctors and Advisors: Best Practices from Leading Consultants and Certified Medical Planners™


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5 Responses

  1. Social Security

    The trustees of the Social Security system’s finances just released their annual report.

    They say the combined trust funds that help pay old age and disability benefits are likely to run out by 2034, the year when today’s 48-year-olds reach full retirement age. The trustee’s estimate reflect the latest economic and demographic projections and change a bit most years. Last year’s estimate for trust fund depletion was 2033.

    So, the Social Security fund is forecasted to run out in 2034:
    http://www.msn.com/en-us/money/retirement/social-security-fund-forecast-to-run-out-in-2034-then-what/ar-AAdlumU?ocid=iehp
    Then what?

    Karmine

    Like

  2. Some Social Security Mistakes That Can Be Fixed

    Though the time period to make changes has narrowed in some instances, there are situations where Social Security allows a redo.

    http://www.financial-planning.com/30days-30ways/social-security-mistakes-that-can-be-fixed-2693620-1.html?utm_campaign=30%20days%2030%20ways-jul%2023%202015&utm_medium=email&utm_source=newsletter&ET=financialplanning%3Ae4809829%3A86235a%3A&st=email

    Stubby

    Like

  3. No SS … for You!

    The US Government says no benefit rise for Social Security in 2016.

    http://www.msn.com/en-us/money/markets/government-says-no-benefit-rise-for-social-security-next-year/ar-AAftuRp?li=AA4Zjn&ocid=U348DHP

    Marsha

    Like

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