Can You Avoid Getting Ripped Off by the Social Security System?

• Author: Schnepper, Jeff A.

Social Security is a scam. It was sold to the American public first as an insurance policy, then as a retirement pension. Neither description applies to Social Security today. Let's look at the system and examine the opportunities to use it to maximize your financial wealth. Social Security really consists of two funds--retirement income and Medicare. If you are self-employed, you contribute 2.9% of your earned income to the Medicare fund and 12.4% (on income up to $68,400 for 1998) into the retirement fund. If you are an employee, you have half of the above amounts deducted from your income, and your employer matches the deduction.

Now, let's look at what you are not getting. Assume you either are bright enough or creative enough to stay in school and not start work until you are 25. You plan to retire at 65, and, therefore, have 40 years to accumulate your retirement fund. Between you and your employer, you contribute a total of $8,481.60 each year ($68,400 x 12.4%). Of course, the average 25-year-old doesn't start at $68,400, but this cap, as well as your income, will increase annually over the 40-year period, so this figure is being averaged out. If this annual contribution was invested privately at seven percent, by the time you reached 65, you would have a retirement fund of $1,693,225. Assuming a 20-year life expectancy to age 85, you could withdraw $13,128 a month, or $157,536 a year. Compare that to the pennies paid by Social Security. That may be one reason why the latest proposals to "reinvent" Social Security have included a provision to take two percent of the 12.4% and invest it privately, like an individual retirement account (IRA).

The rule is supposed to be that you get taxed on your income only once. This is not true with Social Security. Your contributions are not deductible. Therefore, you pay tax on that income even though you never touched it. Then, when you retire and receive your payments, as much as 85% of those dollars are taxed again.

If you don't need the income currently, you can reduce your potential tax by shifting your income from interest on a CD, for example, to an investment in a tax-deferred annuity. Remember, the amount of Social Security that is taxable is a function of your income--including tax-free income. However, tax-deferred income doesn't count. Depending on your other income, a shift to tax-deferred income could reduce or even eliminate any taxability on your Social Security receipts.

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