Did you know you’re funding someone’s retirement? That’s right, the 6.2% tax you pay to social security every time you receive a check, is deposited into a retirees account as a return of their earnings from when they paid in.
As a matter of fact, 40% of the annual income paid to retirees is from their social security benefits.
But if you and the retiree you sponsor earn the same average annual income, how come you only pay 6.2% while they collect 40% ?
In other words, if you both earn $50,000 per year, you’d have to pay $20,000 from your pocket to make up their 40%…but you only pay 6.2% or $3,100 – where’s the magic rabbit?
What if we assigned you a partner to help pay your retiree sponsor’s benefit, that would cut your 40% obligation in half to 20%…almost there…let’s add one more contributing parter to the mix, and now all three partners are responsible for paying 13% of their wages to the retiree. The obligation becomes smaller with each additional contributor.
So the magic, is there are more people in the workforce paying into the system than there are retirees collecting benefits. And that has everything to do the fact that we spend more time working than we do retired.
For example, if you started working at the age of 18 and retired at the age of 65, you will have worked 47 years, but on average you’ll only spend 18 years in retirement.
So what would happen if we lived longer spending as much time in retirement as we did working?
As stated earlier, the system allows for a low tax rate on contributors, with a high payout to retirees by leveraging more workers paying in than those receiving benefits, but that ratio grows smaller each year the average time in retirement increases.
The number of workers would eventually equal the number of retirees, and we’d be right back to square 1 – a 1 to 1 ratio paying the 40% tax.