By Jason DeRusha

MINNEAPOLIS (WCCO) — The headlines are scary: “Social Security Fund: cash gone in 2033.” We continue paying into Social Security with every paycheck, but will we get our money out?

First, how much are we paying in?

According to the Social Security Administration, you only pay Social Security tax on your first $110,000 of salary. Your employer pays 6.2 percent of your salary, you used to pay 6.2 percent, but until the end of 2012 there’s a payroll tax cut in effect, so you are paying 4.2 percent.

Bottom line: you pay in 10.4 percent of the first $110,000 you make into social security: the maximum you could contribute is $11,450 a year, about $440 every other week.

So, how does the government figure out your benefit?

“It’s calculated, based on 35 years of earnings,” said former U.S. Congressman Tim Penny, who now teaches at the University of Minnesota’s Humphrey School. “They try to replace that lifetime earning average with a percentage.”

The actual formula is complex, as your actual earnings are adjusted to account for changes in average wages since the year the earnings were received.

Then, Social Security calculates your average indexed monthly earnings during the 35 years in which you earned the most. Next, there’s a formula applied, based on what your average earnings are, in order to come up with your basic benefit. That’s what you make as a benefit at your full retirement age – which is at least 65 years old.

So, do we typically get back what we put in?

“It depends on how long you live,” said Penny.

The average yearly benefit right now is $14,760, according to the federal government. The maximum benefit is $30,156 for 2012.

“Most people, assuming they live 15-20 years into retirement will get back way more than what they ever paid in,” said Penny.

Social Security’s benefits are funded by the contributions being made now. So today’s employees are paying for today’s retirees.

That’s why most experts believe the social security program will still continue paying out benefits, even if Congress doesn’t take action.

Penny expects changes will come — hopefully sooner rather than later.

“Young people do have this right: there will be changes in this program. It will be somewhat less generous, and they may have to pay more into the program to get the benefits out of the program,” he said.

The options are clear: raise more money or reduce benefits. Penny said it’d be possible to raise the cap on the money eligible to be taxed or increase the retirement age or change the formula to determine the benefits.


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