I got another "Social Security Statement" in the mail yesterday. These things come out every few months, to let you know your earnings history, as far as Social Security is concerned, and to give you an estimate of what you'll receive when you retire or become disabled, and what your survivors will receive if you die.

With all of the hoopla around Social Security lately, I think it's important to note a disclaimer that's been in the Social Security Statements for years:

Your estimated benefits are based on current law. Congress has made changes to the law in the past and can do so at any time. The law governing benefit amounts may change because, by 2042, the payroll taxes collected will be enough to pay only about 73 percent of scheduled benefits.

Basically, what you're going to get when you retire is based on the whims of Congress. Do you trust your politicians with your retirement? If anyone in the private sector ran a pension plan like the politicians have been managing Social Security, it would be criminal.

The other aspect people don't see in writing enough is how much you've paid in Social Security taxes versus how much your employers have paid in Social Security taxes. How Social Security taxes are set up, you pay 6.2% of your income to Social Security tax, and your employer pays 6.2% of your salary in a payroll tax.

So if you make $40,000 a year, you're personally paying $2,480 a year out of your paycheck towards Social Security. Your employer is also paying an additional $2,480 a year in the form of payroll taxes. Some would like you to believe that this is coming out of your employer's pocket, but in reality this is simply considered as part of the total package of what it costs them to hire you. It also affects decisions of when to give you a raise, and how much. For instance, if your employer wants to raise your income $10,000 a year, they are also considering that it will cost them an additional $620 a year to provide you that raise.

The kicker, though, is how much this costs over time. Let's say you've been making $40,000 a year for 10 years. Over that time, you have paid $24,800 in Social Security taxes. Your employer has paid an additional $24,800 in payroll taxes, for a total of $49,600.

Let's suppose that instead of going into a failing government pension program, you and your employer both contribute 6.2% of your $40,000 a year income to some type of managed, low-risk retirement plan that returns a annual rate of return of just 6%. If you started this at age 25, over the course of 40 years, you'd have a whopping $822,485.67 saved for retirement at age 65. If you planned on spreading that retirement income out over 30 years to age 95, you'd be getting $4,931.22 a month.

Based on an income of $40,000 a year, that's way higher than what Social Security currently promises on a similar income.

If I factor in my Social Security contributions, from my age now until age 67, assuming my income never gets any higher (which is very unlikely), my retirement income would be nearly 4 times what my current projected benefits are. This is why creating private accounts inside Social Security is so viable -- it would take about a fourth of my current contributions to fund my currently projected Social Security benefits, leaving the other three-fourths to fund the current recipients. And over the long haul, as more and more recipients receive their benefits from their own accounts rather than from the Social Security and payroll taxes, the taxes can be scaled back to a less dramatic level, which will give our children and our grandchildren a better opportunity for a better life.

Why people are fighting against Social Security is difficult to understand, but why people are apathetic to it is even more difficult to understand. Social Security represents a huge chunk of our income that is being sent to a system that cannot sustain itself. I encourage you to open up and read your Social Security statement next time you receive one, and play with the numbers yourself -- see what those numbers could represent for your future if you could control even a small portion of it.

Labels: politics