Normally, buying coffee is something I do without spending much time thinking about it. So, when I went to Starbucks today to buy my daily coffee, I figured that it would be a day like any other. But, no. Today was different.
After ordering my skinny peppermint mocha (‘tis the season for such drinks) and giving the smiling cashier the espresso beans I was also buying, she rang up my purchase, and as I pulled out a $20 bill, she cried, “Wait! Your skinny peppermint mocha is free because you’re buying beans!” All of a sudden, I was as happy as could be because I had been ready to pay $20 for my coffee and now had to pay only $15. Who doesn’t love getting something for nothing?
That transaction, which took place just after I had given my microeconomics final at George Washington University, got me to thinking about why it’s so hard to solve the fiscal crisis we face today. Just as I loved getting something for nothing, it occurred to me that we all love getting something for less than we thought we had to pay for it.
In terms of government programs, Social Security is one of those programs where most of us will get back more and in many cases much, much more than we paid in. Calls to reign in federal spending by scaling back Social Security benefits inevitably run up against the claim, “I paid for my benefits, and you can’t take them away from me.”
As experts C. Eugene Steuerle and Jon M. Bakija noted in a 1994 paper on how to “retool” Social Security, “Whenever any discussion of Social Security reform comes up, moreover, there are always objections from those who believe that they have earned every penny of their retirement benefits through their lifetime payroll tax contributions, so that any change would be tantamount to breaking a contractual obligation.”
To some extent, this argument is true. A retiree’s Social Security benefits are based on the contributions the retiree made when working through the taxes paid into the system under the Federal Insurance Contributions Act (FICA) tax, more commonly known as the payroll tax. In general, the higher the earnings, the higher the taxes paid and the higher the benefits received. Benefits are paid until the beneficiary dies. Social Security was originally funded through the payroll tax because it created a way to link taxes paid in and benefits paid out.
When considering whether to scale back Social Security benefits, it helps to look beyond taxes paid to Social Security’s net benefits. Then, it becomes clear that what we think about the relationship between what we’ve paid into Social Security and what we’re entitled to receive may not be entirely accurate. For example, the most famous Social Security recipient, Ida May Fuller, paid $24.75 in Social Security taxes and started collecting benefits in 1940 (people didn’t start paying taxes for Social Security until 1937). By the time Ida May died in 1975 at age 100, she had received $22,888.92 in Social Security benefits. That’s a pretty decent return on investment.
Does this mean that all Social Security recipients are receiving more than they expected, just as I did when Starbucks gave me a free skinny peppermint mocha this morning?
That probably depends on who you ask.
As Steuerle and his colleague Caleb Quackenbush estimate, current retirees are net winners from Social Security — they’ll receive more, and in many cases much, much more, in benefits than they paid in taxes. For example, an average one-earner couple that retired at age 65 in 1980 would have paid about $100,000 in Social Security taxes, but will receive more than $375,000 in Social Security benefits, for a net gain of $275,000 (all figures are in constant 2012 dollars). Single men and single women who earned the average wage would have also paid about $100,000 in taxes; the male will receive $207,000 in benefits while the female will receive $254,000. A typical two-earner couple that began receiving benefits in 1980 paid about $200,000 in taxes but will receive more than $460,000 in benefits.
Future retirees, however, won’t fare so well. While benefits will still exceed taxes for the average one-earner couple, the typical worker who retires in 2030 will pay more in taxes than will receive in benefits. A single male, for example, will pay $60,000 more in taxes than he’ll receive in benefits.
But, that’s not what I’m thinking about. It was thinking about how Social Security kept its promise to Ida May that made me feel pretty good about getting a free coffee at Starbucks. Occasionally, it’s nice to get more than what you paid for. And, that’s one reason to love Starbucks, at least for a day.