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Will I Get My Social Security Taxes Back?

A reader writes in, asking:

“After reading about the new online Social Security statements, my husband and I created accounts to check our estimated benefits. The website told me that at this time I do not have enough credits to qualify for retirement benefits. This is not a surprise because I spent many years out of the workforce while raising our children.

I’ve gone back to work, and I understand that if I keep working for another 2-3 years I’ll qualify for benefits. But I’m curious what would happen if I didn’t go back to work. I see the total amount of taxes paid by me and by my employers. Where would that money go? If I don’t qualify for benefits, what happens with all the money in my Social Security account?”

The short version is that you don’t have a Social Security account — at least, not in the sense that you have an account at a bank or brokerage firm. When you pay Social Security taxes, the money does not go into an account somewhere with your name on it. Instead, the money is primarily used to pay for the benefits of people who are currently retired and collecting Social Security.

In other words, when the Social Security website shows you the amount of Social Security taxes that you’ve paid over the course of your career, it does not mean that that money is sitting around waiting for you. That money has (mostly) already been spent on other people’s benefits.

With Social Security, there’s no promise that you’ll get your money back or that you’ll earn a certain rate of return on your money. The promise is simply that (if the rules don’t change and the money is available to pay the promised benefits*), once you become eligible, you will receive benefits for the rest of your life (or until you become ineligible) in keeping with the applicable benefits formula(s).

Different Returns for Different People

It’s simply the nature of the system that different people will earn very different rates of return on the money they pay into Social Security.

Example 1: Susan has a very lucrative career as a physicist, earning the maximum amount subject to Social Security taxes every year from age 25-60. At age 61, she dies suddenly, with no spouse or dependents and having never been disabled.

Result: Susan paid a heck of a lot of money into the system and never got back a dime.

Example 2: Sharon spends her entire career working as a kindergarden teacher at a financially-struggling private school. She enjoys her work, but earns very modest pay throughout her career. At age 60, she marries Luis, a lawyer with a very high earnings history. One year later, Luis dies. Sharon lives to be 103, collecting survivor benefits based on Luis’ earnings history for more than 40 years.

Result: Sharon made out like a bandit, collecting a relatively high Social Security benefit for many years, despite having paid relatively little into the system herself.

The takeaway: The amount of money you end up getting back from Social Security is not directly proportional to the amount of money you put into it. The “total taxes paid” figure on the Social Security website may be interesting, but it doesn’t mean much when it comes to predicting the amount of money you’ll receive.

*Admittedly, this is something of a contradiction in terms. If the rules don’t change, the money won’t be there to pay 100% of the benefits promised by the current system. According to the most recent Social Security Trustees Report, starting in 2033 only 75% of projected benefits are expected to be able to be paid unless some sort of legislative action is taken.

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  1. I have only one stand on this issue — we do not know what the future holds for us. Of course, nobody would like to experience what Susan went through. But then again, we do not know what the future holds for us. Susan herself never knew she will never receive even a single centavo from her Social Security contributions. Similarly, Sharon was fortunate to have married a financially-stable guy like Luis, despite their age. It may be her luck when she received SS benefits from Luis’s contributions. But how would the story end if she did not meet Luis and marry him? She will be receiving small amount from her own contribution. At the very least, she was able to invest a fraction of her salary for her retirement. I guess the main issue is we should consider Social Security as an investment, regardless of the amount. Then, work on other passive income and investments later on.

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