Q: It really gets my goat when I hear politicians refer to Social Security as an entitlement. I worked all my life and paid Social Security taxes all my life. How can they call that an entitlement?
A. They can call it that because Social Security is an entitlement — literally. And I think you've got to blame popular culture, not politicians, for abusing the term.
Social Security is an entitlement in not only the literal but also the legal sense of the term. Social Security is Title II of the Social Security Act. Medicare is Title XVIII — and other programs make up other titles of the Social Security law. So that's where the root word "title" comes from.
Once you meet all the qualifications for Social Security benefits (having enough work credits, being the right age, etc.) then you are considered eligible for benefits. But when you actually file a claim for benefits and get approved, you are legally entitled to those benefits.
So that is what makes Social Security an entitlement program. And for that matter, any other government program for which you have to meet certain eligibility criteria and then sign an application and get approved for benefits is also an entitlement program.
But popular culture, frankly mostly Fox News and the Tea Party folks, have given the term a bad name. They have started using the word to imply some kind of government handout, like welfare or food stamps. Actually, welfare and food stamps are also entitlement programs because you have to meet certain eligibility criteria and file a formal application to become entitled to those benefits, too.
It's just too bad the name has been given such a stigma. There is nothing wrong with being an entitlement program. It's just a legal term.
Q: I got an email from a fellow Tea Party member that proved that had I been able to invest, at a simple 5 percent interest rate, all the money they took out of my paycheck in Social Security taxes for the 40 years I worked, I'd almost be a millionaire today. In fact, I would have had $892,919.88 in accumulated savings.
A: I get emails like yours all the time. If you want to delude yourself into thinking that you, and hundreds of millions of past, current and future retirees in this country would all be millionaires were it not for that nasty old government program called Social Security, well then you just can keep sending your donations to Tea Party candidates and hope they get that they eventually get big brother off your back!
But here is some food for thought. You must remember that Social Security was never set up to be an investment scheme. One of the original objectives of Social Security was to try to strike a balance between what you get out of the program and what the country gets out of it.
The first goal is obvious and, frankly, it's the one in which most people are interested. You pay taxes into the program and eventually you get something out of the system. That's your own equity in Social Security.
But it's the second goal that is actually more important and a major reason Social Security was established in the first place. For example, one of the social goals of "Social" Security is to raise the standard of living of lower income workers. This is accomplished through a retirement benefit formula that is skewed to give lower income workers a higher rate of return (when comparing taxes paid to benefit received) than that received by their more well-to-do counterparts. This has helped lift millions of seniors out of poverty. When the program started in the 1930s, something like 80 percent of senior citizens in this country lived below the poverty level. In large part because of Social Security, that figure is less than 10 percent today.
Q: I paid maximum Social Security taxes from the time I started working in 1971 until I retired at age 66 at the end of 2011. I've always been curious: How much did I pay in Social Security taxes? My Social Security benefit is about $2,400 per month. How long will it take me to get that back?
A: There are all kinds of ways these payback numbers can be presented. For example, some insist the employer's share of Social Security taxes should be factored into the equation. I disagree. After all, it's not like your employer was sending YOUR money to the government. The employer's share of Social Security is simply another tax a business pays. But if you disagree with my take on this, then simply double the number I give you when I present the amount of Social Security taxes you've paid.
I also must point out that I fully understand I am presenting the payback times for someone who works for wages. A self-employed person pays twice as much in Social Security taxes — although over the years, that rate has been reduced by various tax write-offs.
And finally, I must make it clear that in adding up the taxes paid column, I used the Social Security tax, which varied from 4.6 percent when you first started working in 1971 to 6.2 percent in 2011. When some people attempt to do these payback times, they mistakenly add in Medicare taxes paid. Medicare is a completely separate program and is entirely separately funded. It makes absolutely no sense to factor in Medicare taxes when trying to figure out Social Security payback times.
OK, so here are the numbers. Assuming, as you said, that you paid Social Security taxes on maximum earnings from 1971 to 2011, you will have paid $132,740 in Social Security taxes during those 40 years. At $2,400 per month in retirement benefits, you will recoup all the taxes you paid in about 55 months, or a little more than 4 1/2 years.