Social Security: How bad a deal, and why?

Andrew Biggs, American Enterprise Institute

The AP report that today’s new retirees will be the first to collect less from Social Security than they paid in has gotten people talking—I’ve done no less than 15 radio interviews on the topic. Most people think the reason Social Security is a poor deal nowadays is that benefits have gotten less generous over time, but that’s not really the case. The real driver is that Social Security taxes today are a lot higher than in the past.

For instance, a person who retired in 1950 paid around 0.8 percent of his lifetime earnings into the program. The statutory tax rate was 2 percent, but the retiree had only paid in from 1935 (when Social Security started) until 1950.

A person retiring in 1970 paid an average lifetime rate of 3.6 percent, while by 1990 the average rate had risen to 8.0 percent.

But a person retiring today paid an average of 10.7 percent of his lifetime earnings into Social Security, even though the benefits offered by Social Security today are roughly the same as in the past.

So a person retiring today paid in roughly three times as much as a retiree in 1970 to get the same amount out. For future retirees, who will pay the current 12.4 percent tax rate or more over their full working lifetime, things look even worse.

Now, this may still be a good deal—who can say? But I would have been very surprised to hear AARP argue in 1970 that Social Security would still be a good deal at three times the price. Yet that’s more or less what we’re looking at today.

 

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