Social Security benefits in 2014 will go up only 1.5 percent over 2013. Sounds like Ebenezer Scrooge is firmly in charge at the Social Security Administration. Some people believe that the real rate of inflation is more than 1.5 percent, especially when looking at prices for health care, food, and higher education. In fact, some people believe that the real rate of inflation is between five and 10 percent.
The wage ceiling for Social Security Benefits will go from $113,700 in 2013 to $117,000 in 2014. This means that a person who will earn $150,000 in wages in 2014 only has to pay into Social Security on $117,000. There would be no Social Security tax on any wages above $117,000.
The jump from $113,700 to $117,000 is a 2.9 percent increase, about double the 1.5 percent extra that recipients of Social Security will receive in 2014.
Social Security Benefits are based on a tax is 6.2 percent of wages. A worker’s boss has to contribute another 6.2 percent. Thus, a person earning $100,000 a year contributes $6,200 to Social Security. The boss adds another 6.2 percent, bringing the total contribution up to $12,400. (There is no Social Security tax on non-wage income like stock dividends, rent, or bank interest.)
Assume that a wage-earner during the 20 years between 1993 to 2013 earned $100,000 a year. Also assume, during this 20-year span, that prices stayed stable and that the person earned $100,000 each year from 1993 to 2013.
Over the 20 years, the wage-earner would have received a gross income of $2 million. That individual would have paid $124,000 into Social Security. And the individual’s boss would have paid another $124,000 into the system. Thus, the total inserted into Social Security would have been $248,000.
But wait! What would the worker have today if the $2 million were put into the American stock market? Assuming the worker, in 1993, were given his $2 million (for the next 20 years) in a lump sum, he would have stock market portfolio worth $8 million. Compare the $8 million with the $248,000 from Social Security.
Even if the wage earner did not receive a $2 million lump sum payment in 1993, he still would be much better off if he had invested in the stock market instead of putting his (and his boss’s money) into Social Security.
Note that from 1993 to 1999 the stock market rose dramatically. But from 1999 to 2009, the market went nowhere. By 2013, the stock market was back to approximately where it was in 1999.
The time has come to abolish Social Security and these pal;try Social Security Benefits. Let the wage-earner do his own investing. He will be better off financially despite gyrations in stock prices.