Social Security contributions as income?

[guitarplayer]

I have been unpicking our incomings and outgoings and thinking about net worth by the occasion of reconstructing @C40's wonderful graphs in R(Shiny) / Python(Dash). Have a question to put to the forum for a brief exchange on if someone is keen. Please keep in mind I would prefer it to be less on the tactical side and more on the conceptual side. Some preamble reasoning in the next two paragraphs.

As might often be the case for some (it is for me) looking through one particular lens makes one want to represent all variety of stuff in the lens' terms. My guess is this is to do with removing redundancy in the thinking system, so that a variety of things is brought to the same denominator and it is then easier to think about stuff. I appreciate it can bring about hammer-nail problem but let's say we are aware and mindful of that.

Also, I reckon that beyond a certain point it makes no sense to split the hair in four such as below, because 'conventional' net worth is so high that it is immaterial whether social security ever comes in or not*

With the two above said, if I can reasonably assume Social Security will start be coming in at some point, it stands to reason to account for it in any plans to do with finances (see @Kipling's journal where SS is accounted for). And if I go further with this reasoning, I have to conclude that social security contributions are (at least to a certain degree) then a sort of income rather than expense, in the same sense that buying an annuity in instalments would be considered an income rather than expense.

For example, where I currently am, I am accruing monthly ~$35 annual payout from 68 (expecting this to raise to 70) years old. I can multiply it by a factor of say about 14.78 (this factor has some backing in policies) to say that each month my social security net worth increases by about $523. Then treat my Social Security contributions as income (purchase of the promise) and optionally as well top up whatever social security contributions I pay with additional income up to $523.

It reads a bit silly getting down to such nitty gritty but what the hell. Does it make sense to you?

*this simple point comes out of a chat @JollyScot and I and DW had recently IRL - I encourage everyone to meet in real life it is joy to be able to talk about even simple aspects of the framework we are looking at at the forum in a laid back atmosphere.

[chenda]

I'd see them as a form of savings.

[guitarplayer]

Yes, I think this is a better way to phrase it, thanks @chenda. If I am paying it out, hard to call it an income - but it is more something that is attributed to me than a forever gone expense.

[chenda]

Have you looked into SIPPs ? It seems you can save up to £60000 a year with tax relief, it's a protected asset in the event of bankruptcy and your beneficiaries can inherit it outside the inheritance tax threshold. Seems too good to be true...

[guitarplayer]

Totally! I recently dropped a slightly out-of-place comment in @DutchGirl's journal about it - you can not only pay no income tax but get a tax subsidy on your income. Admittedly, tax has to be paid at withdrawal, but there will still be the tax free allowance of 12.7k GBP per person (times too for our household) and the threshold is promised in the most recent budget to get inflation adjusted in 2028. LISA (Lifetime Individual Savings Account) is basic tax (20%) sheltered and the tax never has to be paid back.

*SIPP = Self Investment Pension Plan for people who don't know.

UK has some schemes very much conductive to FIRE / ERE. Just that the overall direction of the country in recent years has been questionable, currency depreciated and incomes stalled. So yeah, good to see an overall context. But also, what goes downhill can bounce back in some way at some point.

Though back to Social Security - it appears to me mind boggling that people often offhandedly just say 'I assume I am not gonna get it' but at the same implicitly say 'I assume the country I live in or am otherwise tied to will deliver a sort of stability on which I can plan for the future in a form other than going extreme prepper'. Which I think if I took this route I would drastically deprioritise making money savings and my personal finance dashboard would be about something else than personal finance, don't know, efficiency or available variants / case studies of Boyd's OODA loops or something similar.

Which maybe I should (re)focus on that again after reading on OODA 2.3 years back following some recommendations of @AH - after I satisfy the personal finance itch (again?) and get that mostly out of the way. Mostly - because it is good to keep it in the system a bit, it is a good topic to talk about, people relate to it.

[jacob]

Though back to Social Security - it appears to me mind boggling that people often offhandedly just say 'I assume I am not gonna get it' but at the same implicitly say 'I assume the country I live in or am otherwise tied to will deliver a sort of stability on which I can plan for the future in a form other than going extreme prepper'. Which I think if I took this route I would drastically deprioritise making money savings and my personal finance dashboard would be about something else than personal finance, don't know, efficiency or available variants / case studies of Boyd's OODA loops or something similar.

Countries already dealing with shortages try to avoid instability by letting people down gently or shifting blame. A popular way is simply to raise the age slowly: You'll get it, but not before your 78 if you're born before < age where people are young enough to not think ahead >.

Anyhoo, if you want to have fun with your tables and statements:

Purchased investments and contributions are an expense.
Taxes are also an expense.

Dividends and selling investments are incomes as is SS.

On your income statement you'll have incomes and expenses the difference of which are (retained) earnings which will be in the form of cash. Specifically it is the amount that your checking account grew with for the given period.

The reason this approach is generally not taken in the FIRE world is because it ignores or at least hides the savings rate. If say you spend 75% on consumption and 25% on investments (lets ignore taxes) because you've already built up your emergency fund, then technically your "savings rate" which would correspond to retained earnings / revenue is 0%.

To further complicate it, once your investments start pushing dividends thus increasing your revenue but your spending on consumption and investment spending stays the same, then your retained earnings / revenue will increase despite having made no changes.

In short, I don't find it overall very useful to lug it in ... or at least not to replace the simpler system. One of the main purposes of accounting is to make it clearer where all the money goes. I think this does the opposite, but perhaps that's just because I'm used to keeping them separate.

A more popular approach is to divide the situation into buckets or eras, like "the working years", "the early retirement years", and "the retirement + social security years". Here you have essentially 2 different FIRE targets. This is a popular approach especially for the crowd where early retirement is just 5-10 years before regular retirement. The 25x crowd essentially assumes that SS will be there. And the 33x crowd are gunning for a full perpetuity and can assume SS will not be there and just treat it as a bonus if/when it comes.

[Henry]

I'm not sure I understand this, but I look at SS as follows - you need to decide what it is to you before you collect it. And there are one or two ways - income or insurance. If you look at the arguments for when you collect, as early as possible or as late as possible, I think the former looks at it as income the later as insurance. I look at it as insurance so contributions are viewed as premiums.

[NewBlood]

Hey gp,

Have you ever played with Mad fientist's projection lab?

(you don't actually have to create an account or use the paid version, you can skip sign-up and play with it, it will just not record any of your settings with the free version and you will have to start all over again if you close it).

You can create a retirement plan by inputting different types of income, expenses, assets, etc...
In the income tab, social security is one of the options. I think it makes sense, once you're eligible, (and as you said, if you think your country will keep its obligations), it will become an additional source of income.

Projection lab even has international presets (in the investments and taxes tabs when you create a plan) and the UK is in there, which is awesome.
My country of course isn't in there, probably because it's a messy undecypherable bureaucratic pain in the butt.

I guess some people choose to not include SS in their projections to be ultra-conservative, since it's also hard to predict how expenses will grow with old age, and then if it's still there by the time you're eligible, great. it gives additional peace of mind.

[Scott 2]

The obligation for future payout is an annuity. You can calculate present value of the asset. Assumptions made (legislative risk, inflation adjustment) will change valuation substantially. Technically it is part of your net worth.

The monthly increase in obligation, offers an imputed income. It is part of your compensation. I'd value the income in one of two ways:

1. Purchase of a similar annuity on the free market. Highly variable, based upon those asset valuation assumptions.

2. Contribution from your pay. With US social security, you can calculate exactly what is sent to the government. When working as a contractor especially, it's very clearly an allocation of pre-tax income.

Options 1 and 2 will offer different values. The gap represents the immediate gain or loss of program participation.



In my own analysis, I found social security moved my SWR by ~0.25%. This was due to the long time horizon before annuity payout and legislative risk. Looking ahead 30-50 years, 25 basis points is effectively noise in the calculation.

So my plan treats it as a hedge against longevity risk. US social security is a government backed, inflation adjusted annuity. Within that context, the obvious assumption is I'll delay taking as long as possible, to maximize my risk protection

Given that there are no other decisions to make, I exclude it from all calculations. I do appreciate the peace of mind it offers. More so from knowing my parents have that safety net, meaning their retirement is not my financial risk.


Depending on how your parents are doing, that's another potentially interesting target for this hammer. Is elder assistance looming? An inheritance? Time horizon is likely closer than social security, but the result is much less predictable.

[chenda]

Dutchgirl made the good point that early retirement should be done backwards. Build up enough pension for normal retirement age, and then work out a way to retire much earlier on you're own capital. That way you have the security of both.

[Laura Ingalls]

I'm not sure I understand this, but I look at SS as follows - you need to decide what it is to you before you collect it. And there are one or two ways - income or insurance. If you look at the arguments for when you collect, as early as possible or as late as possible, I think the former looks at it as income the later as insurance. I look at it as insurance so contributions are viewed as premiums.

Any time we put Social Security PIA’s in any calculators it says take the low earners as soon as possibly and the higher earner as late as possible. So sort of splitting the difference on the insurance vs income thoughts.

Now I am curious if you put in the exact same PIA and ages what opensocial security would do? Not that DH are far off that in the first place with our solidly middle of the road second bend point earning and ages within a year of each other.

[delay]

Though back to Social Security - it appears to me mind boggling that people often offhandedly just say 'I assume I am not gonna get it' but at the same implicitly say 'I assume the country I live in or am otherwise tied to will deliver a sort of stability on which I can plan for the future in a form other than going extreme prepper'.

People say that about Dutch social security ("AOW"), and it is mind boggling to me too. How will they retire? When I ask, people say they will have equity in their house. But then where will you live? And didn't you just take out an extra mortgage to finance a new kitchen? Normal people finance is surreal.

Countries already dealing with shortages try to avoid instability by letting people down gently or shifting blame. A popular way is simply to raise the age slowly: You'll get it, but not before your 78 if you're born before < age where people are young enough to not think ahead >.

Like you say, Dutch retirement age has gone up substantially. In 2000 the retirement age was 65 with many early retirement schemes allowing you to retire at age 60 with full pay. Now the early retirement schemes are all gone, and the retirement age has gone up to 68. What a difference 24 years make!

As a side note, Dutch retirement age is tied to "expected life expectancy", a statistic that is going up while the "life expectancy" is going down.

[7Wannabe5]

If you consider yourself to be a form of Capital which you come into possession of at the age when you first have earned income, and you consider yourself to be fully depreciated on a schedule that concludes with your eligibility to collect Social Security, then you might also consider your contributions to be an expense much like pre-payment of disposal fees. Looking about the "active" retirement community where I currently reside, I would suggest that this is likely the most accurate perspective.

[ducknald_don]

Have you looked into SIPPs ? ... and your beneficiaries can inherit it outside the inheritance tax threshold.

Not any more, that was changed in last week's budget.

[chenda]

Not any more, that was changed in last week's budget.

Ah yes, it's not yet clear though whether that will apply to existing assets in SIPPs. That's always the risk with these things that the rules will change.

[loutfard]

To me, social security contributions are an expense. If I'm feeling very generous, that answer might change to a forced investment in an investment vehicle with zero transparency, high fees, an incompetent investment policy and deeply negative expected real returns.

In my case, a possible future pension is a government promise only. It is not backed by any investment: not on an individual level, nor on a group level, not even partially. Just the less than empty state coffers. I cannot enforce even partial future payout.

My government is a proven unreliable counterparty when it comes my pension. It has retroactively adjusted the rules governing my future pension several times already.

For the social security contributions on my independent contractor side gig, the government doesn't even need to renege on any promises. I pay social security contributions too, with nothing in return.

Also, governments sometimes go under and state pensions with them.

What sense would it make in my case to try and include a future pension into my projections? I don't want to be alarmist. I'm relatively confident even that given some macro stability, I will get some kind of a pension. but from when, and amounts? No clue. I say that as one of the 1% best informed people on these matters in this country.

[Scott 2]

What do your projections look like with and without the pension? Does the model with a pension enable lifestyle decisions you wouldn't otherwise make? If so, what assumptions are required to make that meaningful difference. Is the change in quality of life worth assuming the risk into your model?

That's how I approached the problem. Both for social security and parental support / inheritance. I tend to be overly conservative and based upon those factors, am more comfortable with my chosen SWR. The math says I'd be fine anyways, but I like the additional margin of safety.

[Jean]

I treat expenses that are linked to an income as a reduction of that income.
I treat taxes and compulsory contribution to social programm as an expense incured by my inability to escape government influence.
I treat entitlement to some kind of benefit as an asset.
How you values those assets is always an estimation, like your home or something else.
You just need to be congruent.

[slsdly]

I am one of those that assumes (on some level) I get nothing from the Canadian Pension Plan (CPP). Nominally it is well funded, and aside from jacob's comment about raising age limits, I have no reason to believe it won't be present in some form similar to today. I see my CPP pension as an exercise in risk management, as it is the only inflation adjusted pension I have. By simply ignoring it in my financial planning, it reduces the risk that I will outlive my money in my old age. I do the same thing with regards to any potential inheritance from family at some point in the future. As a result of this, there is some tax optimization I'm failing at here, because if I earn more in post-65/71 retirement, that will reduce the amounts paid by other programs (e.g. OAS, GIS) but I can live with that.

[Scott 2]

By simply ignoring it in my financial planning, it reduces the risk that I will outlive my money in my old age.

How do you mitigate risk of over saving? Spending your healthiest years on accumulation, losing the chance to expend that physical capacity on activities that won't be available later? It's the other side of our safety nets.

The rich broke dead calculator was a powerful reality check for me:

https://engaging-data.com/will-money-last-retire-early/

What it still misses - is the "broken" consideration. Paths close in our 20's, 30's, and 40's too.