If you think Social Security is a genuine, albeit compulsory, retirement program, then you haven’t read the fine print. Most of us have to put money in over our working lives, and then get the privilege of applying for benefits when we reach age 62 or later (somehow, Congress saw fit to exempt federal employees, including themselves). But beyond that broad brushstroke, the program works more like a slush fund, with the government pushing for bigger contributions while fiddling with the formula for who gets what.

The more you make, the less you get.

Depending on the outcome of the next presidential election, the disparity between what you pay and what you get could increase dramatically. You’ll be paying more in taxes and never getting the money back, essentially contributing to the Social Security Welfare Fund. This is just one more way that your taxes are likely to go up in the decade ahead.

The Devil’s in the Details

We talk about Social Security as an income replacement program because that’s how the formula for determining benefits works. The Social Security Administration (SSA) figures out how much you earned each year over your working life, then narrows it down to your top 35 years of income. Each year of income is then inflation adjusted using the “adjusted wage index” table to make it comparable to today’s dollars.

Then the SSA finds an average annual income (all those adjusted dollars added together and divided by 35), which it divides by 12 to figure out your average monthly income.

Here’s where it gets tricky.

If you qualify for full benefits starting in 2019, the SSA will pay you 90% of your first $926 in average monthly income. So if your average annual income over 35 years was $11,112 (12 x $926), then you’ll get almost all of your income replaced by Social Security for the rest of your life.

If your average income was higher than that, the replacement rate falls. For average monthly income between $926 and $5,583 (or $66,996 annual income), the SSA pays 32%.

If your average annual income was $66,996, your Social Security checks would replace about 41.5% of your monthly income. From here, the numbers drop dramatically.

For everything after $5,583 in average monthly income, the SSA pays just 15%, but only up to a point. Benefits are limited to average annual income of $132,900, which is also the top amount on which we pay Social Security taxes.

Because Social Security benefits are skewed to replace more of the income of lower-income workers, the program has a wealth-transfer component. The breakeven point, or where you’re expected to get back essentially what you put in plus a little for interest, is right around the annual average income for a single worker, or $44,000, according to the Urban Institute.

If your average annual income is higher than that, well, you’re contributing to the welfare of others, whether you know it or not, and your contribution is likely to jump in the years ahead.

One Simple Fix

Social Security is broke. The program will run through its trust fund by the early 2030s, then bring in enough to pay just under 75% of the benefits due. Several presidential hopefuls want to make it worse. They propose increasing benefits at the low end well beyond the current Cost of Living Adjustments

(COLAs). To put the program on sound financial footing as well as pay for the extra benefits, they need more money. If you’re still working, or pay taxes on your Social Security benefits, they’re looking at your wallet to make up the difference.

One simple way to fix Social Security funding, although not additional benefits, would be to get rid of the income cap for taxes, but leave the cap on benefits. As your paycheck gets bigger during your working years, your income replacement percentage during retirement goes down. The leakage would go toward making the program solvent.

While that simple move would shore up the program, it would also make Social Security even more of a welfare program.

And this doesn’t contemplate increasing the Social Security tax, which would compound the issue.

This could be the right path. There’s no doubt Social Security is insolvent, and there’s no question that it’s one of the most successful social programs in the history of the U.S., as it moved millions of elderly Americans out of poverty. But we need to discuss the program in clear terms, understanding what we’re being told to pay, and what we expect to receive in return.

Even if we don’t adjust the terms of the deal in the next administration, our window for coming up with an answer is closing. With the population of retirees growing bigger by the day, it’s inconceivable that we’ll pay less in benefits to the average retiree, which means higher taxes for workers, lower benefits for higher-income retirees, or most likely a combination of the two. The only question is, when do we want to solve it?

And for anyone disgruntled because they don’t expect to get back what they put into Social Security, don’t worry. On the Medicare side, we all come out ahead. But as you might expect, that program’s even more underwater, and will run through its trust fund by 2026. We can look forward to higher taxes for that program as well.

The content of our articles is based on what we’ve learned as financial journalists. We do not offer personalized investment advice: you should not base investment decisions solely on what you read here. It’s your money and your responsibility. Our track record is based on hypothetical results and may not reflect the same results as actual trades. Likewise, past performance is no guarantee of future returns. Certain investments such as futures, options, and currency trading carry large potential rewards but also large potential risk. Don’t trade in these markets with money you can’t afford to lose. Delray Publishing LLC expressly forbids its writers from having a financial interest in their own securities or commodities recommendations to readers.

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