By:  Freewavemaker, LLC (Jerry Nix Author)     Date:  01/05/2019

Part 1:  My Story and a Little History of Social Security

I retired in July 2018 from a career as a financial advisor, and thank God I did not plan to live 100% on Social Security.  I thought I understood what retired people on Social Security, alone, were going through until I retired myself.  Let’s take a close examination.

My Social Security earnings started being counted in the year 1967 when I was just 16 years old.  Prior to that (and I have worked since I was 11), I was paid on a cash basis and never claimed any taxable income.  Yes, I know that is against the law now, but as a kid did not know it at the time so, if the IRS wants to arrest me and lock me up – come on and give me a free place to sleep and three meals per day.

From 1967 to 2018, I worked (and from 1976 through 2018 – except just a couple of years – I was self-employed, paying what is called Self Employment Tax).  For those of you who have never been self-employed, that is both sides of FICA (your share and the employer’s share).  Today your share is 7.65%, and the employer’s share is 7.65% – so self-employed people pay the entire 15.3%.  For those who may not know, FICA stands for the Federal Insurance Contributions Act. It’s a U.S. federal payroll tax used to fund Social Security and Medicare programs.

• In 1935: The Social Security Act was enacted, introducing what is known as payroll taxes.

• In 1983: Amendments to the Social Security Act included an increase in the payroll tax rate and the introduction of the Medicare tax. The payroll tax rate for Social Security was set at 6.2% for employees and employers each, and the Medicare tax was set at 1.45% for employees and employers each.

Since then, the Medicare tax has been applied to all earned income, while the Social Security tax applies only up to a certain income threshold, known as the taxable maximum or “tax max.” This threshold has increased over time to reflect wage growth.  Here’s a summary of key changes in Social Security and Medicare tax rates, as well as the maximum taxable incomes over the decades.  This table does not cover each individual year but represents the average per decade:

This table highlights the significant changes in tax rates and maximum taxable incomes over the decades. It’s essential to keep in mind that this is the total tax, which includes both employee and employer portions.  The total tax collected from both parties equals 15.3%, while 12.4% goes to fund retirement, survivor, and disability benefits, and 2.9% is used to fund the ever-increasing Medicare insurance for those who qualify and those who have never put one penny into the system as long as they meet other requirements which I may get into later.

Now, there were actually some changes to the Medicare tax in the 4,000+ page of Obama Care that very few congressmen and senators read before signing it into law in 2013.  Here are the basics of that:

The Additional Medicare Tax was introduced as part of the Affordable Care Act (ACA), also known as Obamacare, and went into effect on January 1, 2013. The tax was implemented to help fund the expansion of healthcare coverage under the ACA.

Here are some key points about the Additional Medicare Tax:

• Tax Rate: The Additional Medicare Tax is set at 0.9%.
• Income Thresholds: For single filers, the tax applies to income over $200,000. For married couples filing jointly, it applies to income over $250,000.
• Employer Responsibility: Employers are responsible for withholding the Additional Medicare Tax on wages exceeding the threshold amounts.
• Self-Employment Income: The tax also applies to self-employment income above the threshold amounts.

The goal of this tax was to generate additional revenue to support the ACA’s initiatives, such as providing subsidies for health insurance premiums and expanding Medicaid coverage (even though at the outset, we were told that Obamacare would actually save us about $2,500 per year per family and that if we liked our doctor we could keep our doctor and if we liked our insurance we could keep our insurance – though none of the “promises” turned out to be true)—typical Politics from career politicians who cannot read what they pass down to us.

Now I tell you all of this so that you will understand when you see my earnings detail below why there are actually two columns of earnings that had taxes placed on them (the maximum earnings rate for the 12.4% and the actual earnings that the 2.9% was being charged on.  This table came directly from the Social Security Administration for my personal Social Security account.  It is available for you as well if you will simply go to www.ssa.gov and sign up to get the information.

Before getting into my actual annual income and tax table, you see a table that shows how much was paid into Social Security retirement by my employers and me since 1967, as well as how much was paid for Medicare by my employers and me. The total retirement cost comes to $256,525, and the total Medicare cost comes to $68,332 (Figure 1).

Now, let’s take a look at the total income that was taxed for both.

If you were to tally the second dollar column (Taxed Medicare Earnings – Figure 2), you’d find that my total earnings over the years 1967 through 2018 (52 years) would be $2,671,921.  This means I earned an average of just 51,383 per year – some years much lower and others somewhat higher.  This is only an average.  Keep in mind for 42 years of this period, I was mostly self-employed, which means I paid the employee and employer portion of the tax – not just the employee portion.  Also, as a self-employed person, I could expense certain items that would not be taxable for income taxes or Social Security taxes (Self-employment Tax).

For me to save $256,525 on my own to fund what is now my Social Security Retirement (see above – Figure 1), I would have to set aside an average of $4,933.17 per year (which is much more than I actually paid into Social Security in many of the years shown) and that equates to an average of 9.6% of my average annual income.  Now, I could put all this on an Excel spreadsheet and figure out just what I would have had to save each year to equal my and my employer’s total retirement contribution, but I decided to do one thing other than that.

We know the Social Security retirement contribution over the decades has gone from 2% to 12.4%, counting employee and employer contributions.  Here are the tax rates for the years that I worked:

We also know that Social Security – though it should – does not pay interest on our contributions. Let us see what would have happened had I been able to set aside this percentage of income each year and earned an annual compounded interest rate of just 5% per year.  The return could have been much higher with stock market-like returns … but for simplicity, we will keep the interest rate at 5% per year starting at the end of the first year.

Take a look at this table …

As shown, in the first year, I earned $916. Had I saved 7.8% of this, I would have saved $71.45. With 5% interest added ($3.57) during the year, at the end of the year, I would have accumulated $75.02.  Then, in year two, I earned $3,101. Had I saved 7.8% of this, I would have saved $235.68. When we had the end of year 1 value to this ($75.02), we would have a nest egg of $310.69, and once the 5% interest for year 2 ($15.53) is added to that, we end year 2 with a total savings of $326.23.  Follow this trend for the total 52-year period, and we end up with total savings in our So-called Social Security Account of $750,471.96 rather than the actual amount of $245,525 that is now (or was in the account) when I retired in 2018.

So, not only does Uncle Sam borrow from mine and your accounts (without our permission, and I will have more on this later), but the government also rips us off by not providing any interest earnings (even though they make interest on OUR money). In my case, the cost of lost interest (if the 5% estimation had been correct) would have been $504,946.96.  Folks that is the equivalent of me giving Uncle Sam $9,710.52 every year over the past 52 years without ever getting anything back for it.  KEEP IN MIND THIS IS OUR GOVERNMENT THAT IS RIPPING US OFF!!!

The $750,000 + looks a whole lot better than the $256,525 we were able to put away without any interest earnings included. However, what kind of income would that provide for a lifetime?  Also, another question would be, why do we not get to draw any interest in the money we are putting into the Social Security benefits that are funded by us and our employers and not the Federal Government?  The government keeps referring to Social Security as an “Entitlement.”  I’m sorry, dear government if the money was put there by me and my employer, it is not an entitlement that you allow me to have but rather a fund that I was willing to establish in hopes that you would honor your promise to make sure it was always available to me – and everyone else that paid into it.

So, what kind of income could a person anticipate if they had a bucket containing $750,000 beginning at retirement and going for their entire life? The best way to predict and calculate this is to “annuitize” the money over a period of years (in this case, life expectancy). I retired at age 67. If I had $750,000 in my Social Security account and it was given to me to purchase an annuity from a reputable insurance company, and I insisted on a guaranteed lifetime income, below is the amount I could expect to get from it.

Regarding mortality (human life span), according to the IRS Single Life Expectancy Table, the life expectancy for a male age sixty-seven is approximately 15.8 years. This means that, on average, a 67-year-old male is expected to live for another 15.8 years. This means that if I retired at 67 (and I did), I should live until at least age 82.8 (we’ll call it 83).  Now, if I invested my $750,000 Social Security fund (again, if it was worth that much and the government would allow me to have it) into an annuity at an insurance company, this is the amount of income I could expect to receive: 

Based on average estimates, a 67-year-old male with a $750,000 fixed annuity could expect to receive around $4,500 to $5,000 per month. This amount can vary depending on factors such as the specific terms of the annuity, the interest rate, and the company offering the annuity. Now, starting this year (2025), I am going into my 8th year of retirement.  Here is what I am actually going to receive based on my most recent Social Security benefit letter:

$3,062 is very different from the $4,500 to $5,000 I could receive if I could invest a fully funded Social Security account into a commercial annuity with a solid insurance company.  As long as the system works as it does, you, the taxpayer, will constantly be ripped off when getting the benefits you should be getting from a fund you established. You may be wondering why. You may even be asking, “Why doesn’t my money in my Social Security account draw any interest?”  The answer is quite simple. I will go into the answer to this and more in Part 2 which I will post in two days after you’ve had a chance to really understand Part 1.  Stay tuned for more outrageous information that will make you sick!

Check back on Sunday 01/12/2025for part 2!