A report by the Urban Institute finds that people retiring today represent the first generation of workers that have paid more in Social Security taxes during their careers than they will receive in benefits after they retire.  And this historic shift is expected to get worse for future retirees.

When Social Security was first enacted in the 1930s, payroll taxes were very low.  In 1960 a retiree could expect to get back seven times more in benefits (in real dollars) than he or she paid in Social Security taxes, as long the retiree made it to age 78 (for men) or 81 (for women).  Low-income workers would have gotten an even better return.  Even as late as 1985, workers at every income level could retire and expect to get more in benefits than they paid in taxes, though they didn’t do quite as well as their parents and grandparents.

By 2011, however, the escalating Social Security tax base and tax rate, coupled with the rampant inflation of the 1980s, took its toll.  A married couple retiring last year and having earned average lifetime wages would have paid about $598,000 (in 2011 dollars) in Social Security taxes during their careers.  Unfortunately, they can expect to collect only about $556,000 in benefits.  And that assumes the husband lives to 82 and the woman lives to 85. Because Social Security benefits are progressive, most low-income workers retiring today still will get slightly more in benefits than they paid in taxes.  Most high-income workers, however, started getting less in benefits than they paid in taxes in the 1990s.

The trustees that oversee Social Security say its funds, which have been built up over the past 30 years with surplus payroll taxes, will run dry in 2033 unless Congress acts.  At that point, payroll taxes would provide enough revenue each year to pay only about 75 percent of benefits.  Future generations probably will have to pay higher taxes while they are working, accept lower benefits after they retire, or some combination of both.

Is there any way to get a better return on your Social Security taxes?  Yes.  Live longer!

Seriously, though, I’ve had many people ask if it’s better to start payments at age 62, particularly in light of the above data.  The breakeven point for earning more by starting at age 70 (as compared to starting at age 62) is age 81.  It’s even higher if you take the early payments and reinvest them.  However, by starting early you are betting that you won’t last until the breakeven age, which is not the kind of bet you’d probably want to win.  Furthermore, should you survive into your 90s or later, you will find yourself receiving much smaller payments than if you had started later.  I prefer to think of Social Security as insurance against running short of money just in case you turn out to be long-lived.  In that sense it’s still one of the best inflation-adjusted solutions available to retirees.

You can read the Urban League report here:  http://www.urban.org/publications/412281.html.