Another Look at the "Return" on Your Social Security Taxes

Last Updated Jan 28, 2011 1:07 PM EST

Recently, CBS MoneyWatch Editor-in-Chief Eric Schurenberg wrote an excellent post summarizing studies showing that most people would receive a positive return on a full career of paying Social Security taxes. I agree with Eric's analyses and conclusions, as I've prepared and reviewed similar analyses in the past and reached comparable conclusions.

I'd like to elaborate here on Eric's post, based on insights I've gained over the years.

Social Security was never designed to be a direct link between the value of your taxes and the benefits you receive. It's understandable that you might have this impression, since the government has used words like "contributions," "insurance," and "trust fund" to describe the program. But your FICA taxes aren't invested in an account that is dedicated to your benefits, even though you receive a statement each year that shows "your earnings record."

It's interesting: There's no other tax where we ask if we get our money's worth, such as income taxes, worker's compensation taxes, state disability taxes, gasoline taxes, auto registration taxes, and so on. FICA taxes really aren't much different, when you think about it.

With Social Security, you're entitled to the benefits that Congress decides you'll receive. Literally. They could eliminate the program tomorrow, and you'd have no legal recourse to restore your benefits, in spite of paying FICA taxes for years. Look at this language in the Social Security statement that you receive each year: Congress has made changes to the law in the past and can do so at any time. The law governing benefit amounts may change.
It's become apparent to me that the federal government considers FICA taxes as another source of revenue to spend on all federal programs. The Social Security "trust fund" isn't invested in assets that are separate from the government; they're invested in special government bonds that will be repaid by taxes on future generations.

It's also apparent to me that Social Security and Medicare represent just one of many types of government outlays. And that means the government may cut your benefits as a way to balance the overall federal budget, regardless of the FICA taxes that you've paid over the years.

Don't get me wrong: I highly value Social Security and Medicare benefits. And the "money's worth" calculations can be an interesting intellectual exercise, giving us valuable insights into how these programs work. But most of us don't really have a choice about whether to pay Social Security taxes; only a very few people have any leeway over determining their taxable income. The money's worth calculations will either make us feel frustrated or feel good, but they won't do anything to improve our retirement security.

So let's focus on what really matters: How can you get the most value from your Social Security and Medicare benefits, given your circumstances? And what do we need to do to make our leaders manage the federal budget so that our future benefits will be affordable by our children? Good answers to these questions will make me feel a lot better about our future.

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    Steve Vernon helped large employers design and manage their retirement programs for more than 35 years as a consulting actuary. Now he's a research scholar for the Stanford Center on Longevity, where he helps collect, direct and disseminate research that will improve the financial security of seniors. He's also president of Rest-of-Life Communications, delivers retirement planning workshops and authored Money for Life: Turn Your IRA and 401(k) Into a Lifetime Retirement Paycheck and Recession-Proof Your Retirement Years.

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