Q. The current stir about the possibility of reducing Social Security payments has many recipients "up in arms". I am 72. I retired at 54 due to an upcoming company spin-off that I was afraid to stay around for to see what the new company benefits might be. I started taking Social Security at 62. Many people my age and older are convinced that they paid Social Security for years and are only getting back their own money. In my case, a quick estimate of my payments to Social Security plus 5 percent interest resulted in a dollar number that Social Security returned to me in about 3-1/2 years.
So I am currently receiving money paid in by younger employees. Most of the current Social Security recipients forget that Social Security payments were very small until about 1986, so the payments my generation paid from the 1950s to the mid-1980s were almost nothing. Is my case not representative of most SS recipients? —D.P., from Longview, TX
A. Your example is representative. Social Security is, and always has been, an income transfer program, not a funded retirement plan. The idea, in 1935, was to transfer income from younger earners who might save it to older retirees whose savings had been destroyed in the Great Depression. The transfer was expected to stimulate the economy by increasing spending while solving a major social problem— the poverty of retirees.
How much you get back relative to how much you pay in depends on your earnings, marriage status, age at retirement and longevity. The demographic that does best is a low income married couple with a non-earning spouse. The demographic that does worst is a high income two-earner couple.
You are absolutely right about retirees forgetting how little they contributed in the past. A 66-year-old worker who retires this year and who started working 44 years ago, in 1967, at age 22 paid 3.9 percent on his first $5,900 of income for Social Security and 0.5 percent for the then new Medicare program. That’s a total of 4.4 percent, or $260 a year. Adjusted for inflation that $260 would be $1,754 this year.
Today, the same worker pays at a 6.2 percent for Social Security and a 1.45 percent rate for Medicare, a total of 7.65 percent. So the tax rate is nearly double. While less than 10 percent of all workers earned $5,900 in 1967, today's worker would pay the same inflation-adjusted amount on an income of only $20,279 a year.
Social Security is a vital and necessary program— it saves millions of elderly people from poverty— but retirees should not kid themselves that they are just getting back money they've put in. As I pointed out in an earlier column, the kids working at McDonald’s have to work a long time to provide just one senior with the bargain breakfast.
Q. My 16-year-old grandson and I purchased a HUD foreclosure house about two years ago and will soon be selling it. Since he is a minor all the paperwork is in my name. I will be giving him $1,000 or more on this property and more on future properties we work on together. We're wondering how best to invest this money for him, preferably, in his name. He'll be starting college in two more years. Since the money we're investing now will be for his eventual retirement, do you think it would keep him from receiving college loans or scholarships? — F.D., by email
A. Assets your grandson has in his name will, generally, be included in any assessment of college aid. Some scholarships are given on the basis of need, but others on the basis of ability without regard to need.
Rather than focus on his retirement, an event that is decades away, I suggest that you focus on the hurdle immediately ahead of him.
Every dollar he has to pay for college education today is a dollar he doesn’t have to borrow and pay off over a very long tomorrow. If you can be part of helping him graduate debt free, he will have an advantage over the millions of young people who are in virtual indenture to lenders.