Articles for Financial Advisors

Social Security Tilt

Social Security Tilt

A taxpayer retiring in 1960 could expect to get back 7x more in benefits than what he paid in, as long as the recipient lived to age 78 (age 81 for women). The ratio was even higher for low-income workers. Even by 1985, workers at every level of income could expect to take out more in benefits than what they contributed. Single workers and two-earner couples retiring in 2008 or later (up to 2069) can expect to cumulatively withdraw ~ 80% of what they paid in; one couple earners (worker + non-working spouse) can expect 120-130%.


A married couple retiring in 2011 cumulatively paid ~ $598,000 in Social Security taxes, assuming both spouses worked full time. This same couple can expect to collect ~ $556,000 in benefits if the man lives to age 82 and the woman lives to 85 (source: Urban Institute study). According to Social Security Administration, ~ 25% of married couples and ~ 50% of single recipients rely on Social Security for 90%+ of their income.


Way to Fix the Social Security Shortfall

Over the next 75 years, Social Security is expected to pay out $134 trillion more in benefits than it will collect; this translates into $30.5 trillion in 2012 dollars, based on a Social Security projection of 2.8% inflation over this 75-year period. Phrased another way, if Social Security had an additional $8.6 trillion in present value that returned 2.9% above inflation, the problem would be solved for the next 75 years. One solution to fully replace this shortfall is to increase the payroll tax by 2.67 percentage points. This would cover the 75-year projected shortfall and provide an extra year of benefits for everyone.


Social Security Benefit Facts

According to Social Security Administration (2012), 56 million people receive Social Security benefits and of those 56 million:


§  36 million are retired workers ($1,235 average monthly benefit)

§  8.7 million are disabled ($1,111 average monthly benefit)

§  2.5 million are spouses ($590 average monthly benefit)

§  4.3 million are children ($564 average monthly benefit)

§  4.4 million are widows or widowers ($1,152 average monthly benefit)


Social Security Global Comparison

According to OECD and Social Security Administration (2012), the retirement age when a worker can get full benefits is age: 65 (France), 67 (Germany), 65 (Greece), 66 for men age 62 for women (Italy), 68 (U.K.) and age 66 (U.S.).


According to these same two sources, the share of wages replaced by retirement benefits for the average worker in 2010: 49% (France), 42% (Germany), 96% (Greece), 65% for men and 51% for women (Italy), 32% (U.K.), and 39% (U.S.). Tax rates dedicated to public pensions in 2009: 17% (France), 20% (Germany), 20% (Greece), 33% (Italy), no separate pension tax (U.K.), and 12% (U.S.). The share of GDP spent on cash benefits in 2007 was: 12% (France), 11% (Germany), 12% (Greece), 14% Italy), 5% (U.K.), and 4% (U.S.).

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