What's the "Return" on Your Social Security Taxes?

Last Updated Feb 28, 2011 2:02 PM EST

Whether you believe it or not, Social Security is going to be a part of your future, and when the time comes, you'll be glad you've got it. Yes, our national pension system has some well-known fiscal problems, but Uncle Sam can solve them by any number of bearable cost-cutting and/or tax-raising solutions before the money runs out. The question remains, though: Is it worth it? Will the benefits you'd receive under current law compensate you for the career's worth of taxes you'll have paid into the system? The latest answer, generated by a new Urban Institute Social Security study, is: yes. (Surprised?) As far as it's possible to project, Social Security and Medicare give you a positive return on your tax "investment" even after inflation.

That question has been chewed over through the years with generally less upbeat answers. Uncle Sam, for example, does its own Social Security money's worth calculation and generally shows that the payoff for being a loyal Security Security taxpayer shrinks a lot with each succeeding cohort. The big difference is that the Urban Institute study, conducted by Eugene Steurle and Stephanie Rennane, adds in Medicare. That, it turns out, has been a very good deal, in part because all taxpayers (not just Social Security payroll taxpayers) pick up so much of the cost.


A random walk through the Urban Institute numbers below show that Social Security definitely plays favorites. Ladies, you make out better than men, tax dollar for tax dollar, because a) you are more likely to make it to retirement and live longer once you get there; b) you're more likely to collect widow's benefits and c) you're not stuck with the benefit you've earned from working; you're also entitled to the half your husband's benefit if that turns out to be higher. (The benefit, of course, is available to the lower-earning spouse regardless of gender, but let's face it, that's usually the woman.)

How's it shake out? If you retired last year as an average wage-earning man, for example, you could expect a lifetime benefit worth $417,000 in today's dollars on $345,000 in taxes. If you were a woman with the same work history, you could expect to collect $464,000 on the same taxes.

But of course, ladies, the system does find a way to stick it to you nonetheless, as this Boston College study of women and social security points out. Because you qualify for a spousal benefit whether you work or not, the taxes you pay if you do work are totally wasted if don't earn enough to qualify for higher benefits on your own. As a result, there's a high implicit tax on your decision to work or not.


Other winners? Social Security is strongly tilted in favor of married couples with single breadwinners, as you can see below, just as you'd expect of a system that launched in 1935. The other winners, stated before but borne out the new Urban Institute study, are baby boomers and their parents. The Social Security payoff tends to decline for later generations. But then, we already knew that the boomers' kids were in for it anyway, didn't we?


More on CBS MoneyWatch:

Can I Rely on Social Security?
No Social Security COLA: How Unfair is That?
The End of Social Security's Interest-free Loan
  • Eric Schurenberg

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