Recently I've seen increased reemergence of the story that Social Security benefits weren't sufficiently funded by contributions. Because I've been asked by several people (here blue zen) to repost earlier calculations I described in comments in The Economist and other places, I'll risk boring you with a description and the results. With some notable exceptions, most people have paid for their benefits with room to spare.
The meme that claims that SS payments haven't been covered by the payments made by individuals and employers (or self employed individuals) depends on a simple fallacy. The comparison adds up the payments made over a lifetime of employment, and then compares this with the expected total payout. If you think this is reasonable, please loan me $1,000,000 interest free; my descendants will gladly repay the principal over 20 year starting around fifty years from now out of the expected ~10,000,000 or so that the money will likely earn. Of course, assuming 2% inflation the money will only be worth ~240,000 seventy years from now.
Making these comparisons requires either a present value calculation or a future value calculation. These routine procedures are essentially compound interest calculations, and are the basis for all kinds of conversions from lump sum to time distributions. The main variable in converting a stream of calculations into an equivalent present value lump sum is essentially an interest rate or rate of return. Rather than use stock market strategies to show how much money could have been amassed in a best case scenario, I used the rates of ten year T bills, a conservative approach that essentially mirrors what the government would have had to do without the SS income stream. There is an additional factor; if the government hadn't had the SS income stream, its additional borrowing would have driven the T bill rates up. T bill rates varied by decade from 4% to ~10% during the free spending, hard borrowing Reagan eighties. 7% was typical.
The following tables show the social security tax rates during the entire life of the program, and the maximum taxable incomes. I haven't used the medicare deduction because that pays for something else, but I have used the employee+ employer contribution to the program, roughly equivalent to the self-employed contribution. Note the very small payment made during the 30s and 40s, and modest payments made in the 50s. It is true that the early participants got good deal, and often got more out than they paid for. For thirteen years the maximum deduction was $30 per year. Now it's aroid $14,000.
(Sorry that this table is so crooked; it is perfectly aligned in the typing box, but turns rancid when I save it. )
Year Individual
Social Sec Individual medicare Individual +
employee Soc sec Self employed medicare Self employed Social Sec
1937-49 1
1950 1.5
1951-53 1.5 2.25 3
1954-56 2 3 4
1957-58 2.25 3.375 4.5
1959 2.5 3.75 5
1960-61 3 4.5 6
1962 3.125 4.7 6.25
1963-65 3.625 5.4 7.25
1966 3.85 0.35 5 8 0.35 7.7
1967 3.9 0.5 5.9 0.5 7.8
1968 3.8 0.6 5.8 0.6 7.6
1969-70 4.2 0.6 6.3 0.6 8.4
1971-72 4.6 0.6 6.9 0.6 9.2
1973 4.85 1 7 1 9.7
1974-77 4.95 0.9 7 0.9 9.9
1978 5.05 1 7.1 1 10.1
1979-80 5.08 1.05 7.05 1.05 10.16
1981 5.35 1.3 8 1.3 10.7
1982-83 5.4 1.3 8.05 1.3 10.8
1984 5.7 1.3 11.4 2.6 11.4
1985 a 5.7 1.35 11.4 2.7 11.4
1986-87 5.7 1.45 11.4 2.9 11.4
1988-89 6.06 1 45 12.12 2.9 12.12
1990-2015 6.2 1.45 12.4 2.9 12.4
Maximum Taxable Earnings Each Year
1937 - 50 3,000 1984 37,800 2000 76,200
1951 - 54 3,600 1985 39,600 2001 80,400
1955 - 58 4,200 1986 42,000 2002 84,900
1959 - 65 4,800 1987 43,800 2003 87,000
1966 - 67 6,600 1988 45,000 2004 87,900
1968 - 71 7,800 1989 48,000 2005 90,000
1972 9,000 1990 51,300 2006 94,200
1973 10,800 1991 53,400 2007 97,500
1974 13,200 1992 55,500 2008 102,000
1975 14,100 1993 57,600 2009 106,800
1976 15,300 1994 60,600 2010 106,800
1977 16,500 1995 61,200 2011 106,800
1978 17,700 1996 62,700 2012 110,100
1979 22,900 1997 65,400 2013 113,700
1980 25,900 1996 62,700 2012 110,100
1981 29,700 1997 65,400 2013 113,700
1982 32,400 1998 68,400 2014 117,000
1983 35,700 1999 72,600 2015 118,500
I calculated the present value for each year of contributions by compounding each year separately on the basis of the T bill rates on a per decade basis (the earning rate varied). For example, if the T bill rate is 4% that year an investment of $100 becomes $104 the next year and $108.16 year after. The total present value of the deductions is then the sum of all these contributions.
Let's examine two cases, both retiring in 2015 at 65. Individual #1 is making 4,000 per year in the early 70s, reaches 10K in 1977 and then gradually increases his/her earnings to 30K in 1997 at age 47. Individual 1 makes 30K per year for the rest of his/her working life. The present value of the contributions is ~$321,000. The social security benefit (from the SS website calculator) is $1504/month, or 18K per year. Clearly the present value, deposited in a mattress, would pay 18K a year for almost 18 years, but it isn't in a mattress. The government is using it. We then have to do an annuity calculation to see how long it would last. (It would be easy to buy such an annuity privately with $321,000). To do the calculation we need an investment yield rate, a COLA rate, and an initial benefit payout. I quite conservatively used 4% for the rate and 2% for the COLA; the lump sum equivalent would last nearly 22 years at this rate. Since the life expectancy of the average worker is less than 87 years, the contributions appear adequate. (AARP is flogging for-profit lifetime annuities currently with a 5.6% payout rate, yielding 18K with a survivors benefit but no COLA. The comparison between SS and some of the better private annuities (see Barron's) depends critically on future COLAs, something that is far from certain)).
In the second case, individual 2 has a similar earning history at first, but reaches 10,000 in 1977, gradually increasing to 30,000 in 1982 and 51,300 ( the cap) in 1990. SS earnings thereafter reach 90,000 in 2005 and follow the maximum until retirement in 2015. The trajectory of individual #1 is typically working class, while #2 is professional middle class. The present value of #2's contributions is ~$710,000. The initial payout is ~$28900 per year. The lump sum equivalent would last nearly 25 years in the mattress model, but using 4% and 2% for yield and COLA numbers we don't exhaust the principal until year 33. Not many in that cohort will live to 98, so clearly the program was overfunded for moderately high earners. The faster the income of a retiree increased, the more overfunded the eventual benefit is.
So if the typical working stiff contributed slightly more than should be needed to fund his/her retirement, and modestly well off middle class people contributed much more than needed, did everyone collecting benefits make excess contributions? No. As mentioned earlier, people who started accumulating credits in the 30s and 40s did quite well. Because the benefits are not proportional to either deductions or preset value, low income people sometimes get more benefits than they paid for. So do survivors (often children), the disabled, and people with odd earnings histories (e.g. very low SS earnings for all but the last ten years could produce a present value of only ~$166,000 from ten years of very high earnings.) There are very few such people. Shame on us if we demand that orphans or the disabled fully fund their own benefits; shame on Congress for paying for this out a program it's trying to kill, rather than the general tax revenues.
I hope this makes it clear what the approximate value of your contributions is in current $, and how that present value translates to what is essentially an annuity payment, hopefully with some COLA provision. I also point out these assets, often in the $500-750K range, are family assets of the middle and working class. I certainly have no intention of allowing my family to be deprived of contributions I made over the last 50 years. Nobody else should either. Don't allow generational BS to distract you from what is essentially class warfare.