Social Security: Imbalance Between Taxes Paid vs Benefits Received Set To Increase — How Much Do You Get on Average for What You Pay In?
The basic idea behind Social Security retirement benefits is that you’ll spend your working years paying into the system through payroll or self-employment taxes, and the money you pay in will come back in the form of retirement benefits. It doesn’t quite work that way, though. You’ll likely receive a lot more in benefits than you paid in through taxes, according to a new analysis from the Tax Policy Center — and that discrepancy is contributing to Social Security’s funding problems.
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The analysis, released on Monday, Nov. 13, focuses on how much hypothetical workers receive in lifetime benefits compared to how much they pay in taxes that help fund Social Security and Medicare.
One of its findings was this: For a single male earning an average wage every year and who retired in 2020 at age 65, lifetime Social Security and Medicare benefits would equal about $640,000. However, total taxes paid in would be just less than $470,000 — a difference of $170,000.
For a couple with one average earner and one low-wage earner, average benefits would total about $1.24 million, while taxes paid would be about $680,000. In this case, the difference is $560,000. The amounts rise and fall for other hypothetical households as their incomes rise and fall relative to average wages.
Moreover, the imbalance between taxes paid and benefits received is expected to increase in coming years. In the case of Social Security, that increase is being driven by gains in real wages, while Medicare benefits “face upward pressure” from higher healthcare costs and new health services.
Both programs will also pay more in benefits because of longer life expectancies. Lifetime benefits would double for those turning 65 in 2060, according to the Tax Policy Center. A couple with one average earner and one low earner retiring in that year is projected to receive about $2.5 million in benefits.
“Lifetime benefit payments in excess of dedicated taxes have been supported for a long time by a number of factors — in particular, a ratio of workers to beneficiaries that has been declining especially rapidly as the baby boomers retire,” Tax Policy Center co-authors C. Eugene Steuerle and Karen E. Smith wrote in the report. “Absent reform, lifetime benefits scheduled to be received by households increasingly exceed the taxes dedicated to these programs.”
When boomers were in their prime working years, the Social Security Administration built up a funding surplus because the money coming in through payroll taxes exceeded the money going out in benefits. But that surplus is fast drying up as more boomers start collecting Social Security.
Social Security’s Old Age and Survivors Insurance (OASI) Trust Fund is expected to run out of money in about a decade. When that happens, the program will have to rely solely on payroll taxes for funding — and those currently cover only about 77% of benefits.
Similarly, the Medicare Trust Fund faces depletion within the next decade, leading to debates on whether to cut funding for the seniors’ healthcare program.
Given the near-term depletion of the Social Security and Medicare trust funds, the Tax Policy Center recommends reforms that would scale back the rate of benefit increases while still allowing lifetime benefits to “increase significantly” for each cohort of future retirees.
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“Policymakers could also consider tax increases and longer work lives to address the challenge of having fewer workers supporting more and more retirees,” Steuerle and Smith wrote. “But whatever mix of reforms Congress chooses, these findings reflect how the current math for these programs doesn’t add up. Regardless, reform should target lifetime benefits and taxes across generations directly, not just accidentally as a byproduct of other choices.”
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This article originally appeared on GOBankingRates.com: Social Security: Imbalance Between Taxes Paid vs Benefits Received Set To Increase — How Much Do You Get on Average for What You Pay In?
