I have some bad news. Starting less than five years ago, the average American now pays more in Social Security taxes than he or she is set to receive in benefits. And to make matters worse, this deficit is only getting bigger.
Check out the following chart, which shows the difference between what a typical retiree receives in total lifetime Social Security benefits minus the total amount of Social Security taxes the retiree paid during his or her working years. It's organized based on the year in which a person turns 65.
The average American who turned 65 in or before 2005 was likely to get more out of the system than he or she paid into it. This trend peaked for the retirement class of 1980, as the typical single male or female who reached full retirement age that year will draw an estimated $139,500 more in total benefits than he or she paid in lifetime Social Security taxes.
Starting with the retirement class of 2010, however, this relationship inverted. And it appears to have done so permanently.
From here on out, an unmarried American taxpayer earning an average income will pay more into the system than he or she draws out of it via retirement benefits. According to the Urban Institute's predictions, this trend will peak in 2030, when an average-earning individual will pay $55,000 more than he or she receives.
Taxpayers won't suffer equally
Not all segments of the population face the same dismal reality.
Single men are the hardest hit by this trend. It's estimated that the typical man turning 65 in 2030 will pay $70,000 more in Social Security taxes than he will take out in benefits.
By comparison, thanks to differences in life expectancy, a similarly situated woman will face a deficit of only $40,000.
|
Taxpayer(s) |
Total Social Security Taxes Paid (Retirement Class of 2030) |
Total Social Security Benefits Received (Retirement Class of 2030) |
Difference (Taxes Paid Minus Benefits Received) |
|---|---|---|---|
|
Single male |
$411,000 |
$341,000 |
($70,000) |
|
Single female |
$411,000 |
$371,000 |
($40,000) |
|
Average one-earner couple |
$411,000 |
$570,000 |
$159,000 |
|
Average two-earner couple |
$821,000 |
$712,000 |
($109,000) |
Source: Urban Institute, Social Security and Medicare Taxes and Benefits over a Lifetime (2013 update)
The best off from this perspective are couples with a single breadwinner. A couple that falls under this category (and turns 65 in 2030) will pay a total of $411,000 in Social Security taxes over its lifetime but receive $570,000 in benefits.
The reason is simple: Even though there's only one taxpayer, the spouse is nevertheless entitled to his or her own spousal share, which maxes out at 50% of the wage earner's primary insurance amount.
Is this because Social Security is running out of money?
The growing deficit between what you pay and receive isn't because the Social Security system is running out of money. Given that it's a pay-as-you-go system, there will always be money coming in.
The issue stems rather from the fact that the retirement age is continuously increasing. Since the Social Security system's inception in the 1930s, the full retirement age has gradually increased from 65, to 66, and now to 67 for people born in 1960 or later.
The result is twofold. On one hand, by encouraging people to delay retirement, it increases the system's tax roll. And on the other, because retirement is delayed, the aggregate value of benefits paid is reduced.
The bottom line is that future generations will have to do more with the portion of their disposable income that isn't absorbed into the system. That means saving more over the course of their working years. It also means investing early and often, as time and the law of compounding returns are the surest ways to offset dismal trends like these.
