Is Social Security Ripping You Off?

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Social SecurityIn all the hype and emotion surrounding the debate, it's easy to miss the real point about Social Security -- whether it's worth it for most Americans.

As with most government programs, Social Security has winners and losers. It provides at least basic subsistence-level benefits for most retired workers regardless of their income level. On the other hand, many workers would be better off if they were allowed to invest their own Social Security in private accounts.

Whether that's a ripoff depends on your point of view. So let's look at what the numbers actually say about this hot-button topic.

How Much Are You Going to Get?

As complex as the calculations can be, the idea behind Social Security benefits is pretty straightforward.

Benefits are based on average monthly earnings for your 35 highest-paid years. Once eligible, you're paid a certain amount for each dollar of your average earnings:

  • For average monthly earnings up to $749, you receive $0.90 in benefits for every dollar of average earnings.
  • From $749 to $4,517, you receive an additional $0.32 for every extra dollar.
  • Above $4,517, you receive $0.15 more for every additional dollar.

Add up these three amounts and you have the base amount for your total monthly benefit.

Luckily, you don't have to come up with those numbers by yourself. The Social Security Administration sends you a statement that estimates your future benefits, including not only what you'll get after you retire but also possible disability payments as well as what your spouse and children will receive when you die. Alternatively, you can go to the SSA website and get the same numbers there.

Once you have your monthly benefit, you have a decision to make. If you want to start taking payments immediately at age 62, you can, but you only receive 75% of the base benefit. To get the full base amount, you have to wait until your full retirement age, which for 62-year-olds this year is age 66.

Which Workers Do Well and Which Get Ripped Off?

By looking at various examples of earnings and benefits, you can determine the implicit rate of return retirees get from their "investment" in Social Security. Because of the way the SSA calculates benefit amounts, certain categories of workers get better returns on their taxes than others:

  • People who earned relatively modest wages during their working years receive a relatively large benefit compared with their average monthly income and therefore the Social Security taxes they paid during their careers.
  • Those with relatively short careers also do relatively well, for essentially the same reason. Even if you earned a lot, your 35-year average will be pretty low if you only had high income in a few of those years. Social Security requires 40 quarters of work experience to be eligible for benefits, but if you worked that long, your returns on your taxes paid will be pretty good.

But Social Security isn't a great deal for most workers, when you compare benefits with the returns they could have achieved investing on their own.

Even though the stock market hasn't performed very well lately, long-term returns from a private account are enough to exceed relatively low rates of return from Social Security. That's especially true for high wage-earners, some of whom actually lose money on the Social Security taxes the government withholds from their paychecks.

Don't Forget the Value of Social Security's Other Benefits

Given that most people get bad returns from Social Security, it's tempting to conclude that private accounts would be better. But it's very difficult to estimate the payoff on benefits that go to people other than you.

Remember, without Social Security, your spouse and children might miss out on benefits. In addition, the disability insurance that Social Security provides can pay huge returns if something happens to you during your career. Getting private disability coverage to replace what Social Security provides can be very difficult and expensive.

What do you think about Social Security? Let me have it in the comments section below!

Every dollar that Motley Fool contributor Dan Caplinger eventually gets from Social Security is an unexpected gift in his eyes.


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66 Comments

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luqe110

There is only one problem with Social Security. That problem is that it is run by a government that has zero moral values and at best is as amoral as it can get. The minute the politicans, you know who I mean , those criminals we send to Washington, D C to supposedly do the peoples business found a way to take this money and use it for whatever and what they left behind are worthless pieces of paper , called I O U's. It was not a rip off when instituted and it brought many, many people a fairly decent life over the years. Now here we are again with these gangsters making every attempt to screw us some more. It is never ever enough when it comes to the Obama's of this world. We have lost our dream, our leaders of finance rob us blind, the auto manufactrurers are run by the damned unions who have over the years bled that industry dry. The government decided unions were such a good way to filter money, they allowed government unions. What a great way to pay off your political debts, and here too Mr. Obama has given a whole new meaning to corrupt government.He owes the unions his lungs.
What a country America, and just think, it is so good the Mexicans nolonger want to come here. Look out Canada, you could be next.

August 09 2011 at 2:27 PM Report abuse rate up rate down Reply
Jetncat

The moral of this story: Never trust anyone especially the govt to invest your money wisely. The word "Social" means to spread around. In other word to spread around your wealth to others. Give me the money and allow me to invest the way I want. The Govt banks on you dying before collecting it. They should of given us cigarettes for free.

August 08 2011 at 12:28 PM Report abuse +1 rate up rate down Reply
crhenry33

I am now drawing Social Security benefits. Without doing all the calcuations, I would prefer to have had the opportunity to bypass the whole system and used the funds to provide for my own future. I believe that I could have done a much better job. In any case, I would feel much better about the outcome.

August 08 2011 at 9:48 AM Report abuse +1 rate up rate down Reply
1 reply to crhenry33's comment
luqe110

Be real careful here. With the new world economy do you really believe this nonsense that the government tells us. Without manufacturing and production we have nothing to sell the world. What are we going to sell, our financial expertise. No we need something more than our word, the world has found out our politicans are bottom feeders and will sell us off in a heart beat.

August 09 2011 at 2:32 PM Report abuse rate up rate down Reply
jerald3739

If Social Security had been managed according to the way it was set up there would have been enough money to index benefit payments to the cost of living and without any worry about not having enough to make the payments. Over the years our incompetent lazy lawmakers have drained the fund of its money as well as allowed tons of welfare people to switch to collecting social secuirity after the money they were getting from welfare dried up. It is as simple as that. It isn't social security that is cheating us, it is the friggin Congress.

August 07 2011 at 8:43 PM Report abuse rate up rate down Reply
sierramt222

Well america and all of us social security recipients try getting your arms around these horrible facts that in the years 1966-1967-1968 that Pres. LBJ through executive order transferred on three occasions from the social security trust fund a total of $6.3 trillion dollars to the defense dept. to pay for........GET READY.........THE VIETNAM WAR........SO JUST WHERE DOES THIS GRAB YOU?????????? This situation runs much deeper than paving roads,stop signs and pot holes................THESE TREASONOUS POLITICIANS HAVE LITERALLY ROBBED SOCIAL SECURITY UNTIL HELL WON'T HAVE IT...............In the meant time s.security trust fund holds the IOU'S which in today's money would be about $24.6 trillion dollars............This money will never be repaid (THIS IS DEFAULT)...........So wonder no more why social security is in some difficulty.........THESE ARE THE TRUE FACTS.........NOW THESE BASTARD TREASONOUS POLITICIANS ARE SAYING TRUST US TO FIX THIS..........MY ANSWER IS "SCREW" YOUR TREASONOUS (HONORABLE) SOB ASSES.....................

August 07 2011 at 2:21 AM Report abuse +3 rate up rate down Reply
janghouston

I recieve social security disability and I had a private policy I paid on for 17 years. I was a Realtor for 30 years and made about $5,000.00. a month. Now because I bought that policy I am covered. I had a simple fall in a flower shop and tore my ACL, had the operation and got a staff infection the next week followed by emergency surgery to take out all the hardware. Then a redo of the first operation. I had planned to work until I was at least 70. I was 55 when it happened. I would have lost everything if I had not bought the policy. I can no longer stand for over 15 minutes without pain but my bills are paid.
Social Security is a big part of my financial retirement plan and I want to recieve what I was promised. To hell with the greedy Republicans who want to take it away. close some overseas bases and tax the rich.

August 05 2011 at 6:08 PM Report abuse -1 rate up rate down Reply
1 reply to janghouston's comment
savemycountry911

To hell with the tax, borrow, print and spend Dumbercraps.

August 05 2011 at 8:42 PM Report abuse +1 rate up rate down Reply
gardinerda

I am happy that I DO have social Security...it is a big cornerstone of my retirement. My husband and I worked hard all of our lives, educated our children, and saved a bit for our retirement. A BIG "Sacrifice" when compared to what others in the same income group did. I am glad we did not buy a bigger home, or the most expensive cars, or even a new car every 5 years or so. Instead we stayed in our second home, bought a new car every 10 to 15 years, when we had "run it into the ground", and did not purchase jewelry or expensive clothing or expensive furniture. Now, we both have a small pension from saving what we had, and only a small amount of debt, and some savings. We DO have enough to live on, but others who spent everything are no longer in their own homes (big and beautiful), but in elderly housing. Thank Goodness for Social Security! It is the difference between comfortable and just scraping by!

August 05 2011 at 2:28 PM Report abuse rate up rate down Reply
kenneth

On more than one occasion during my working career, I discussed and disagreed with my late father on the subject of Social Security. He, having lived through the Great Depression, when he claimed that he could not have bought a job, even if he had had the money, thought that FDR was the next best thing to Jesus Christ. He was a strong defender of the Social Security system. I, on the other hand, maintained until I was in my mid-forties, that I would gladly opt out of Social Security if the government would simply refund what I had paid in over the years--with no interest or adjustment for inflation.
It just might be that we were both right. For my late father, SS allowed him and my mother to live a modest retirement without being plunged into poverty. I, on the other hand, continued to pay ever higher SS taxes until my retirement. While my SS is a welcome addition to my retirement income, I am convinced that I could have made better use of the funds while I was still working. Further, I was savvy enough to provide for my retirement years by investing in an IRA and investments in the stock market.

August 05 2011 at 1:02 PM Report abuse +1 rate up rate down Reply
ray powell

Face the facts if the fed didn't force people and employers to pay into SS many would not and would not save anything either. I live very comfortably on my SS benefit in fact unless I purchuse some new toy or entertainment I can actually save a few hundred every month. As a self employed person most my life I paid the full amount of 13.5% of my income into the program which at tax time choked me up a bit but now I'm glad for it..
I do think that SS was meant to supply income to folks that had no other means of supporting themselves and I do not believe that millionaies should recieve payments. I like to look at SS as a insurance policy, like health ins. you buy the insurance just in case you get sick. SS shoould be the same you pay the premium just in case you can support yourself in old age.

August 05 2011 at 10:58 AM Report abuse +1 rate up rate down Reply
Gumby

We used to earn a mandated 5 1/4% interest on saving accounts until Reagan came in and deregulate banks. For anyone's own private retirement plan to work , there has to be some kind of guaranteed returns on everyone's own private retirement plan. We cannot leave to chances .. We cannot invest in stocks and bonds. We can only invest in fixed income vehicles with 100% principal guarantee plus interest. This is the only way to go.

August 05 2011 at 10:52 AM Report abuse -1 rate up rate down Reply
1 reply to Gumby's comment
viktorisltd1

you can't be serious. you have no idea how the free market works, do you?

August 05 2011 at 1:49 PM Report abuse +2 rate up rate down Reply