This must be the time of year when the Social Security Administration sends out its annual statement of estimated benefits; mine came in the mail yesterday. Usually I read it and am disgusted at how little I'll be receiving when I'm 67. Yesterday I did the math, and I was absolutely flabbergasted. You really need to do your own math for yourself. Here's why:
Based on the information in the statement, it will take me more than 11.5 years to receive Social Security payments that equal merely what has been paid into the system on my behalf! Let me say that again in a different way. If you add up all the money that I and my employers will have paid for my Social Security taxes over the course of more than 50 years of work, I will have to live until I'm 78 just to get back the principal! And when I die, nothing is left for my beneficiaries.
I'll try to explain a formula for you to follow. On page 2 of your statement, you'll find a dollar figure for the estimated monthly payment you will receive if you retire at your "full retirement age." My retirement age is 67. At the bottom of page 2, look for another dollar figure that represents "your estimated taxable earnings per year after 2004." This is your salary from 2004 that was subject to Social Security (SS) taxes. It is also the salary that SS is using to estimate what your benefits will be when you retire. Then on page three near the bottom, look for two more numbers that represent the total amount of SS taxes that you and your employer(s) have paid on your behalf. Remember, 6.2% of your salary (up to $90K) is SS tax, but your employer pays another 6.2%. That's the data you need. Now here's the formula.
1. Multiply your annual salary by .124 (12.4%). This represents the amount of tax you and your employer will pay into SS every year. (This formula assumes that your salary will stay constant every year until you retire. It probably won't, but your benefits will increase if your salary increases, so it is a reasonable assumption. The Social Security Administration bases your estimated benefits statement on this assumption.)
2. Multiply your annual tax by the number of years remaining until your full retirement age. This is the total amount of tax you and your employers will pay into SS from now until your full retirement age.
3. Add the number from step 2 to the amounts from page 3 that you and your employer have paid into SS up until now. The sum of these amounts is the total amount that you will pay into SS by the day you reach full retirement age.
4. Multiply your estimated monthly benefit at your full retirement age (found on page 2) by a factor of 12. This will provide an estimated annual benefit that you'll be paid at retirement age.
5. Finally, divide the total amount you pay into SS in your lifetime (the answer to step 3) by your estimated annual benefit (the answer to step 4). The number that is staring you in the face is the number of years it will take for you to receive the principal (no interest) if you start drawing SS at your full retirement age. For me, that number is 11.55 years.
That, friends and neighbors, is highway robbery. The only way to change this system is for young people to start getting obnoxious about how our SS taxes are being stolen from us to pay for Congressmen and Presidents wasting our money on projects that bloat their power base. You do the math, and then let your voice be heard. Your elected representatives can say whatever they want about pros and cons of different plans, but they can't run from these numbers if you won't let them. I'll be contacting my Congressman and Senators. Visit www.house.gov and www.senate.gov to obtain your legislators' contact information.