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Are Americans Getting Their Money's Worth From Social Security?

By Sean Williams – Updated Nov 30, 2018 at 1:54PM

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The answer may come as a surprise.

According to an analysis from the Center on Budget and Policy Priorities, no social program does more for the American public than Social Security. Of the more than 62 million people receiving a benefit check each month, an estimated 22.1 million are kept out of poverty as a result of their payout. Of these 22.1 million, slightly more than 15.3 million are retired workers. Put in another context, the elderly poverty rate would be more than four times higher if Social Security didn't exist.

Yet, there's some debate over just how much Social Security actually does for the average retired worker. After all, in September 2018, the average retired worker was bringing home just $1,417.22 a month, or a little over $17,000 a year, based on data from the Social Security Administration. That doesn't seem like a lot of money considering that many of these workers potentially paid into the system for three, four, or even five decades.

A Social Security card wedged in between cash bills.

Image source: Getty Images.

It raises the question: Are Americans really getting their money's worth from Social Security?

The answer: Yes, in most instances they are.

Here's why you're probably getting your money's worth from Social Security

Every year, the Urban Institute, a Washington, D.C.-based think tank that examines economic and social policy, updates its analysis that examines the received and expected lifetime benefits of both Social Security and Medicare. It does so by looking at what a low-, middle-, and upper-earning man and woman would receive from each program every five years from 1960 through 2060, using constant-year dollars to illustrate the effects of inflation. With the exception of high-income earners, everyone else appears to be making out like a bandit from Social Security (and especially Medicare). In short, they're collecting far more income from Social Security than they've paid into the program.

Social Security's primary source of funding is its 12.4% payroll tax on earned income of up to $128,400 (as of 2018). Income earned beyond $128,400 is exempted from this tax. Last year, $873.6 billion of the $996.6 billion collected came from this payroll tax. Essentially, the more you earn (up to $128,400), the more you'll pay into Social Security.

A senior man counting a fanned pile of cash bills in his hands.

Image source: Getty Images.

According to the Urban Institute, a single man with low earnings (defined as $23,400 in 2018 dollars) would be expected to pay $135,000 into Social Security during his lifetime if turning 65 years old in 2020. However, he would also be projected to collect $193,000 in lifetime benefits, beginning at age 65. That's an expected gain of $58,000 over what this fictitious low-earning individual put into the program over his lifetime.

The same holds true for a single middle-income man, which is defined as having $51,900 in earnings in 2018. Assuming this individual turns 65 in 2020, he will have paid $299,000 in lifetime Social Security payroll tax, but will collect an estimated $318,000 in lifetime benefits -- a gain of $19,000 over what was paid in.

The only folks who don't win appear to be high-earners, which are defined as having $83,000 in income in 2018 dollars. By 2020, a high-earning man turning 65 would be expected to pay $479,000 in lifetime payroll tax while collecting "only" $421,000 in benefits -- a net negative of $58,000. Then again, the wealthy also, presumably, have more ability to save and invest than low- and middle-income Americans, reducing their chances of being reliant on Social Security during retirement. 

It's also worth pointing out that since women, on average, live longer than men, their net gain using the above dollar amounts in Urban Institute's analysis is even higher.

A senior woman holding a stack of cash bills in her outstretched hands.

Image source: Getty Images.

Demographic changes suggest everyone, including the rich, may get their fair share

What you may not realize is that as time passes, everyone, including the rich, may wind up getting their money's worth out of Social Security.

You see, since 1960, the average life expectancy in the U.S. has risen by roughly nine years. We're also seeing a higher percentage of Americans than ever make it to age 62 (the earliest claiming age for a Social Security benefit). As health education, access to medical care, and pharmaceuticals improve, it's not out of the question that everyone will receive more from the Social Security program than they put in via payroll tax.

This is especially true for the wealthy, who are benefiting from growing income inequality in this country. With little to no financial constraints when it comes to accessing preventative visits, medical care, and prescription medicine, the well-to-do are living substantially longer than lower-income individuals and families. Even though these wealthier individuals have paid more into the system than most Americans, their increasing longevity may allow them to net more from Social Security than what they paid in over the long run.

Of course, there are variables that could alter this outlook. Namely, the pace at which the maximum taxable earnings cap rises (the aforementioned $128,400 in 2018 that adjusts in step with the National Average Wage Index), and whether Congress makes an adjustment to the payroll tax rate at some point in the future. But as things stand now, Social Security is a net positive for most Americans.

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