Photo credit: hbd
One of the big questions that many folks face with regard to Social Security benefits is – I’ve paid in so much, will I ever see it come back?
I thought I’d show what a payback break-even might look like, in terms of the money you put into the system and what you’ll get back out of it. I made an assumption in the calculations:
Future COLAs were not calculated into the example, keeping things in terms of today’s dollars. COLAs would only confuse the calculations.
Full Retirement Age
In this first series I assumed the normal, Full Retirement Age scenario, with two options: 1) you earned exactly half of the wage base that SSA requires withholding for each year of your 35-year working life, and you’re now age 66 and 2 months, Full Retirement Age; and 2) you earned exactly (or more than) the maximum amount of money that the SSA requires withholding during that period. Here’s the outcome:
| Earnings | Withholding | Benefit | Payback Period | |
| Half | $1,608,000 | $99,696 | $2,113/month | 3 years, 11 months |
| Full | $3,216,000 | $199,392 | $2,889/month | 5 years, 9 months |
Did you find that surprising? I bet you might have. So, in terms of dollars in, dollars out, you get your money back out of the system in less than six years, less than four if you earned half of the max.
I’ve included the half wage base example to point out the fact that people who earn more take a longer time to receive all of their money back out of the system. This is because of the way your benefit is calculated – notice that the benefit for the half wage base earner is actually 73.1% of the benefit of the full wage base earner, even though the half wage base earner only earned (and paid in) half of what the full wage base earner did.
But wait a second… if I didn’t have that money withheld by SSA, I’d be doing something with it, right? Okay, let’s look at the situation if you had put that money into a savings account for later use (even though there’s a strong likelihood you’d have just bought something with it, right?).
Saving The Withholding Yourself
So we’ll assume that you put this money aside in a savings account which earns 3% per year. Here’s the outcome:
| Earnings | Withholding (plus interest) |
Benefit | Payback Period | |
| Half | $1,608,000 | $160,884 | $2,113/month | 6 years, 4 months |
| Full | $3,216,000 | $321,770 | $2,889/month | 9 years, 3 months |
Still, in my opinion, a pretty surprisingly low number. This means that, in the maximum withholding example, you’ll get back everything that you put into the system in less than nine and a half years, by your age 75 and a few months. In the half wage base earner example, your money is returned to you in less than six and a half years, by age 72 and a few months.
What happens though, if you take your benefit early, at age 62?
Starting at age 62
Since at age 62 you’d be taking the benefit at a 75% rate, this will take a bit longer to pay back, but you’re starting earlier so you’ll perhaps have more life ahead of you to achieve the payback. Here’s the result from these calculations (with the interest factor built in):
| Earnings | Withholding (plus interest) |
Benefit | Payback Period | |
| Half | $1,409,400 | $139,938 | $1,585/month | 7 years, 4 months |
| Full | $2,818,800 | $279,875 | $2,167/month | 10 years, 9 months |
In the half wage base example, your payback period is increased to more than 7 years, but you’re only age 69 and 4 months at this stage. With the full wage base, a year and a half is added to the payback period, but instead of age 75, you hit the break-even point just before age 73.
Just for grins, let’s figure this out for filing at age 70.
Starting at age 70
By delaying to age 70, you achieve an 8% increase in your benefit each year. Here’s the tale of the tape (again, with interest added in):
| Earnings | Withholding (plus interest) |
Benefit | Payback Period | |
| Half | $1,923,900 | $205,265 | $2,845/month | 6 years, 0 months |
| Full | $3,847,800 | $410,529 | $3,878/month | 8 years, 9 months |
In the full wage base example, your personal money paid into the system, with interest added, is paid back in just a bit less than nine years (right at six years in the half wage base example), when you’re just less than age 79. In the half wage base option you’ve been paid back in full just at your age 76.
A note about the calculations: Don’t get too hung up on the specifics of the calculations – they’re meant to be a representative example that the payback of what you had withheld occurs relatively quickly. The assumptions that I made throughout may not match your own circumstances, so the result will differ somewhat, but the principle is the same.
Conclusion
If you happen to have the mindset that you should try to get your money back out of the system as soon as possible (which I believe is a short-sighted approach), then you should start taking your benefit as early as possible at age 62. You’ll get your payback before age 72 if you’ve maxed out your withholding, or before age 69½ in the half wage base example.
Unfortunately, you’ll be short-changing yourself (and your spouse, if you’re the primary breadwinner) of future increased benefits at the cost of saving only four years in the payback cycle (or five years in the half wage base example). Of course, this assumes that you do live at least to the ages we calculated. See the article Ah, Sweet Procrastination! for more details on the benefit of delaying taking your Social Security benefit.