No wonder Americans don’t understand Social Security

The quote below is from a website giving money advice. The question being answered was about the taxation of Social Security.

The problem is the answer is misleading and perpetuates myths people like to believe.

You did not pay for your benefit over your working career, you and your employer paid taxes, just like income taxes or any other tax. What you paid in payroll taxes has nothing to do with your Social Security benefits. Your benefits can be increased or decreased by changes in the law regardless of what you paid in taxes.

If you were to marry one year before collecting Social Security benefits, your spouse would get a benefit based on your earnings and you paid not one cent in taxes for those added benefits.

Social Security taxes are invested and in an investment vehicle. They are invested in interest paying special US Treasury Bonds, similarly to the Treasury bonds purchased by individuals and governments, except they cannot be traded. It’s more appropriate to think of these bonds like a US Savings Bond. “Savings bonds are debt securities issued by the U.S. Department of the Treasury to help pay for the U.S. government’s borrowing needs. U.S. savings bonds are considered one of the safest investments because they are backed by the full faith and credit of the U.S. government.”

To say your payroll taxes are given to government for just an IOU is very misleading. That “IOU” is the investment vehicle similar to the “IOU” you would get if you bought municipal bonds as an investment.

So, you paid for your Social Security benefit with after-tax dollars over your entire working career, and now you have to pay tax on your benefits so it sure looks like double taxation, Kiely said.

Your and your employer’s contributions are not actually invested in any investment vehicle,” he said. “Your contributions are added to the general fund at the U.S. Treasury and the Social Security Administration gets an IOU from the Treasury Department.”

One comment

  1. No One and I mean No One if they get SS benefits for longer than 10 years paid for those benefits in the FICA taxes that were paid into SS. The exception might be a high earning single self employed individual. That is what people need to be told. There is also no way to know if an employer did not have to pay FICA taxes on an employee, that they would of included the savings in increased wages. I will get everything that was paid in FICA taxes (adjusted for inflation, 2018 dollars) back in just 6.6 years. I started SS benefits at age 62, it would be even a faster pay back if I waited to FRA or age 70. I just hate it when people cry about a low or no cola and complain about not having enough in retirement, many times because of bad choices that were made during their working years. I can’t wait until 2035 and SS benefits have to be cut by 20% or more. wiping out most of the last 10 years of colas. I am saving and investing for that day, many will do nothing and suffer greatly. I do not believe Congress will do anything to fix SS, if they do I will have a windfall.


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