Tuesday, March 01, 2005

Were Bush's plan to eliminate the Social Security wage cap implemented, someone making $200,000 a year would pay almost $14,000 more in taxes EVERY YEAR ($200,000 - $90,000 X 12.4%) - bringing their Social Security taxes to almost $25,000 a year.

Using my trusty 1-2-3 (which I still prefer over Excel), $25,000 a year invested at (just) 5% for 25 years (until retirement for our hypothetical 45 year old) adds up to $657,000. This nest egg would in turn yield $52,000 in annual payments throughout a 20 year retirement (assuming 5% in interest). Not exactly enough to keep up that $200,000 lifestyle but not too shabby.

Of course, Social Security doesn't work that way. So, in return for these contributions, what does this hypothetical taxpayer get?

Cranking some numbers into the Social Security Administration's web site shows that someone earning $200,000 a year for the next 25 years would get a whopping $32,400 a year - almost $20,000 a year less than they would get if they invested their money on their own.

It's worth pointing out that even if there were no raising of the Social Security wage base, Social Security is a lousy investment for workers making six figure salaries. Raising the wage base without raising benefits (which, for obvious reasons, won't be done), is just rubbing salt into the wound.