A Very Personal Look at Social Security

1937 was the first year anyone paid social security taxes. They paid 1% and their employer paid 1%, total of 2% on the first $3,000 of wages. So it cost the employee a maximum of $30.00; ditto for the employer. Stayed that way until 1950. Rate went up to 1.5%. By 1960 the rate was 3%, or 6% in total – employee and employer. The rate was then applied to $4,800 of wages. So, 23 years into the program, rate had tripled and the base increased by 60%.


The base wages have moved up a lot since then. By 1970 the base was $7,800; 1975 - $14,100; 1980 - $25,900; 1985 - $42,000; 1990 - $51,300; 1995 - $61,200; 2000 - $76,200 and 2010 - $106,800.


By 1966, the rate had increased to 3.85% and the government added in Medicare for another .35% - total 4.20%. And, remember, the employer is paying another 4.20%. Also, there was no cap on wage levels for the Medicare rate portion.


The rate keeps moving up a fast pace. By 1970 the combined rate (social security and Medicare) increased to 4.80%; 1980 – 6.13%; 1990 – 7.65% where it is today.


So, this plan that cost a worker $30.00 in 1937 can now cost an average worker making $42,000.00 a year, $3,213.00 right off the top of his/her check and, of course, the employer pays another $3,213.00. Grand total for average worker - $6,426.00 per year. Let’s assume you work for 40 years and make the average pay during that time. Now let’s say that you were to invest $6,246.00 per year for 40 years. And let’s assume a fairly low interest rate such as the current 30 year Treasury bond rate which is about 4.70%. How much money would you have after 40 years of making a $6,246.00 annual payment into a tax free retirement account? Guesses, anyone. It would have to be at least 40 x $6,246.00 or $249,840.00. So, guess. $300,000? $500,000? How about a cool (drum roll please) -------

$737,000.00!!!

And that would be your money. You could spend it; give it away; leave it to your kids or the local charity of your choice. You could buy an annuity to pay you a very nice retirement income and have more than enough to buy health insurance. Sometimes it pays to consider alternatives to government programs. Each and every government program has winners and losers. The winners are the people who don’t pay in but still get the benefits and the people the government employs to manage the programs paperwork. The losers are all the rest of us. By the way, if you and your spouse both worked and earned average paychecks, you would have almost $1.5 million for your retirement!   Savings and compounding are not scams; they are very real.  They are one of TheFundamentals.


For our readers who want to have some fun, go to http://www.moneychimp.com/  and click on the calculator link and enter your own specific statistics – earnings, time period, interest rate and so on. Vary the amounts. Many people can and will earn a lot more than the average. We offer this caution however. Doing this financial exercise may raise your blood pressure. We suggest you do it in a calm environment. We also suggest that you do it on November 1, 2010; several times.