The government sticks it to upper middle class recipients of Social Security. A lot of them do not know how badly they are being cheated.
An article in this month’s Fortune describes it. The author is a self-employed writer.
He says that the spring report from the trustees of the Social Security Trust Fund will report that the fund’s position is deteriorating faster than expected.
He thinks there will be political calls to adopt means-testing for the rich. He then adds: “But here’s a dirty little secret: Social Security is already seriously means-tested. And my situation shows it.”
He and his wife pay separately.
After we finish paying two separate federal taxes that will be credited to the Social Security trust fund, our net benefit will be only about a third of what we and our employers have paid into Social Security over more than 50 years. That strikes me as some pretty serious means-testing. And keeping the current system with its uncontroversial means-testing is a lot less divisive than trying to eliminate benefits for “the rich,” however you define them.
Now, let me show you the numbers for my wife and me. Our benefits are worth only 75% of what we and our employers have put into Social Security since I drew my first paycheck in 1961, plus the interest earned on that money. I know this because in 2009 I asked Social Security’s actuaries to calculate that ratio to help me write a Social Security story.
So, they took a 25% loss. I call that cheating. He doesn’t.
They will get taxed at a 35% rate on retirement income. They have other income.
Because I have other retirement income, my wife and I will pay tax on 85% of our Social Security. That tax is at a 35% rate — because of the alternative minimum tax, not because I’m in the top bracket — so we’re paying the IRS almost 30% of our benefit. It goes to the Social Security trust fund.
In addition, I pay Social Security tax because I’m still employed. Fortune and I will pay a total of $11,450 this year, about 25% of my benefit. This, too, goes into the Social Security trust fund, and will increase my benefits only slightly. (I’m assuming, as analysts do, that the employer’s piece of Social Security is in effect paid by employees.)
Add it all up, and the net benefit that my wife and I get is only about 35% of the value we paid in. Even if I retired and stopped paying Social Security tax, we’d get only slightly more than half of what we put in.
He thinks that’s OK. I call it cheating.
But he worries that the law will be changed to define him out of the pool. He will still pay, but will get nothing.
I call that cheating, too.
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