Social security issues October 6, 2021
Social security issues
by AMAC Certified Social Security Advisor Russell Gloor
Mature American Citizens Association
Ask Rusty – If I die, what happens to the Social Security taxes I paid?
Dear Rusty: I have heard that when my wife and I die, the government keeps everything we have paid into social security. Is it correct? Signed: Curieux Senior
Dear curious: Social security contributions paid while you and your wife were working were not deposited into a personal account for each of you; rather, they were used to pay benefits to those receiving social security at the time. This is how the program has worked since its inception in 1935 and how it still works today. The money you contributed has already been used to pay benefits to others. However, hopefully you and your wife will live to claim your own benefits, and what you get when you claim will be based on your saved income throughout your life (up to the income you paid FICA social security contributions on) . These historical earnings are adjusted for inflation and the amount of your lifetime average monthly earnings is determined, from which your base benefit is calculated. Just as you and your wife helped pay for those who were receiving SS benefits while you were working and contributing to Social Security, those who are working and are now contributing to the program will help you pay benefits to you and your wife.
You might be interested to know that studies show that most workers get back whatever they have personally contributed to Social Security within 3 to 5 years of starting their benefits. One study I know of looked at how long it would take the average Social Security beneficiary who starts their benefits at full retirement age (FRA) to get back an amount equal to what they paid into the pension fund. SS. This study looked at four different hypothetical employees – one who earned only half of the National Average Salary Index (AWI) in his lifetime; another who won 100% of the national AWI in his lifetime; another who earned 150% of the AWI in his lifetime; and yet another who earned the maximum annual payroll tax cap for his entire life. The study then determined how much each of these individuals would have paid in payroll taxes during their top 35 earning years (from which SS benefits are calculated). Next, the study looked at what their SS benefit would be at full retirement age and calculated how long it would take each person to recoup the FICA Social Security taxes paid over their lifetime. The analysis found that the lowest paid beneficiary would get back everything paid into social security within about 34 months, and the highest paid beneficiary would get back all that was paid within about 34 months. 63 months. For clarity, this study looked at salaried workers who pay FICA Social Security taxes; those who are self-employed and have to pay both employee and employer share of SS tax need to collect benefits longer to break even.
So the answer to your specific question is that the money you and your wife contributed to social security while you were working has already been used to pay benefits to others who were receiving benefits at the time you contributed. in the program. Hopefully by the time you and your wife move on, you will both have received a lot more Social Security benefits than the taxes you paid to the program while you were working. If you were an employee, you only need to receive benefits for around 3 to 5 years to get a head start.
One final note for those who claim they could better invest this money on their own: not paying Social Security tax on employment income is not a personal option.