Is Social Security Ripping You Off?

In 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.

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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.