Social Security You earned it you keep it

[MaryRose416568]

We need to get our Congress Representatives to support the 'You earned it you keep it' bill. This allows for raising the cap on the taxable earnings and stopping the federal taxes on SSN.  This would keep the trust fund solvent until 2054 and decrease the long range deficit.  This is a win for all retirees..  We need AARP support.

[Tonster521]

@sktn77a I agree that compound interest over long periods of time can accumulate to significant amounts of money. However, the money needs to stay invested (compounding). The SS Trusts (Old Age/Survivor and Disability Income) have activities (FICA receipts and benefit payments/expenses) that vary from day to day. If you have not done already, I suggest you review the links (info) that Gail1 has included in her August 14th replies. While at the SSA website, take a look at the SS Trust transactions in aggregate (Billions) as well as the monthly investments/redemptions of Special Issue Treasury securities (both Certificates of Indebtedness and Bonds). If you go back to 1984, you will see how the SS Trusts started digging out of the hole they were in (depletion) by increasing FICA contributions by about 9% from 7% to 7.65% from 1984 to 1990 (still only 7.65% today). Also, the SSA reduced benefits by increasing the Full Retirement Age to 66 and 67 (about 7% each year) and implemented taxing SS Benefits for folks with "combined income" above certain thresholds. Because the tax on 50% of SS Benefits is returned to the SS Trust, I have viewed this as a "means testing". The SSA does not consider this return of SS Benefits via the federal tax provisions as a "means rest". 

I am including a link that provides  easy to understand examples of how one's SS Benefit is developed  https://www.ssa.gov/oact/ProgData/retirebenefit1.html Hopefully, I copied and pasted the link correctly even with my old software. At any rate, you can find the examples at the SSA website. The examples use 40 years of Nominal Earnings (you pay FICA on this) and Indexed Earnings (adjusted for inflation). You only use 35 years of Indexed Earnings. The Indexed Earnings ($2,235,012 for Case A) which is far greater than the 40 years of Nominal Earnings (estimated around $1,450,000) due to inflation. I did not add all 35 years of Nominal Earnings, but rounded. I believe the difference is de minimis because FICA is still only 7.65% which equals $765 for each $10,000 difference. Also, I am using FICA at 7.65% for all 40 years of Nominal Earnings even though the rates were less before 1990. So, $1,450,000 divided by 40 = $36,250/year X .0765 (7.65%) = $2,773/year in FICA. or $110,920. I rounded pennies down. Click on Next Step and you will see the Primary Insurance Amount (PIA) calculations. For Case A, the PIA at FRA is $2,383/month or $28,596/year. However, Case A is electing early SS Benefits at age 62, or $1,668/month or $20,016/year. Case A will receive all of the FICA paid in about 5.5 years or by about age 67.5 or so, Depending on how long Case A lives will determine the percentage. If case A lives to the average of about 84 years, Case A contributed about 25% of the SS Benefits. Remember, Case A had 40 years of Nominal Earnings which many do not. I did not use the time value of money and compound interest because we do not have individual accounts with the SS Program. It is not an IRA or 401 K type of account wherein you accumulate interest /dividends for retirement.I believe the SSA is correct when stating that folks contribute "on average" about 15% of the SS Benefits they receive. How did you arrive at 50%?

[GailL1]

@sktn77a 

Are you saying you would like any reserve to be invested in something other than interest-bearing obligations of the United States or in obligations guaranteed as to both principal and interest by the United States?

Each person does not have an actual Social Security Account.

Most collections are paid out in benefits nowadays so there isn’t much that could be invested for compounding.  

[sktn77a]

"Are you saying you would like any reserve to be invested in something other than interest-bearing obligations of the United States or in obligations guaranteed as to both principal and interest by the United States?"

Not at all, I'm saying if interest rates hadn't been held close to zero (real interest rates have actually been negative) for so long in order to prop up the stock market/"economy", the SS trust fund would be in much better shape and not be running out in 2034/5.

[Tonster521]

@sktn77a Interest rates are complicated. I don't know if anyone can predict the direction of interest rates or manipulate interest rates to affect certain outcomes. I do know that the Federal Reserve sets the interest rate for overnight funds. Essentially, this is the rate the Feds charge banks when they borrow overnight from the Feds to meet reserve requirements. The market through competitive bidding Treasury Auctions and Bid/Ask trading in the secondary market set interest rates for Bills, Notes, and Bonds.

If you are referring to Bank CD rates being held close to zero, this is a business decision by the Bank's Management. Each Bank sets their own CD rates. Think of Bank CDs as time deposits. However, brokered CDs are subject to Bid.Ask trading. Their values may increase or decrease depending on the direction of the market.

I am linking information from the SSA website regarding the interest rate formula for the Special Issue Treasuries that the SS Trusts uses when revenue exceeds expenses https://www.ssa.gov/oact/progdata/intrateformula.html Please note that the formula has been used since 1960. 

I agree that the SS Trustees could have demanded from Congress a better formula. However, it is one of several solutions that should be reviewed by Congress. The Treasury is paying greater interest on the long bonds bought by Japan and China than the Special Issue Treasuries issued to the SS Trust. https://www.ssa.gov/cgi-bin/investseries.cgi I am linking Investment Holdings for the SS Trusts through July 2024 from the SS website. You may need to drill down by clicking on the topics that appear on the left side of the screen. I am not sure how copy and paste function will appear in this post. Please note the weighted average interest rate hovering around 2.5% and the value of the SS Trusts at $2.8 Trillion. I previously indicated $2.9 Trillion (rounded) which was from 2022. That reduction is significant. We need more workers paying FICA taxes. Our Labor Participation Rate is only around 62%. It was around 65% in the early 2000's. We need higher minimum wages or Employers to simply increases lower paid worker wages. Don't hold your breath on voluntary pay increases. 

[GailL1]

Don’t confuse the rates in the open market with the average or effective interest rates assigned to those Social Security Reserve instruments.

Remember, the US is in debt so any payment to the Trust Funds for the interest is just adding to the overall debt.  

Social Security Nominal Interest Rates 2000 - 2023 

Social Security Interest Rates - General Info

[DirkB349973]

I also wanted to point out to anyone that doesn't know, if you owe federal tax on your benefits at the end of the year, you can request withholding be taken out.