Question

A major concern with Social Security is the possibility that funds will not be available when today’s tax-payers retire to become beneficiaries. According to the Social Security Trustee’s report, an increase of 1.89% in the Social Security payroll tax would keep the account full for the next 75 years. To achieve similar results, benefits would have to be decreased from the current 42% of the ending salary to 29% of the salary.

Cindy is relatively new to the workforce. She has 32 years until she can retire. Her current annual salary is $45,000.

1a) Calculate how much Cindy will have to pay in Social Security tax (6.2%) based on this salary.
1b) Calculate how much Cindy will have to pay in Social Security tax if the tax was increased by 1.89%.

2a) Calculate Cindy’s annual Social Security benefit (about 42%) if her salary remains unchanged until she retires (annual average is $45,000).
2b) Calculate Cindy’s annual Social Security benefit if her salary remains unchanged but benefits (based on her annual salary of $45,000) were cut from 42% to 29%.

3) If Cindy were given a choice between the increase in Social Security tax now or the decrease in Social Security benefits when she retires, which would you recommend she choose? Explain your answer thoroughly.

Answer 1

1a) $45,000 * 0.062 = $2,790

1b) 6.2% + 1.89% = 8.09%; $45,000 * 0.0809 = $3640.50

2a) $45,000 * 0.42 = $18,900

2b) 42% - 13% = 29% $45,000 * 0.029 = $13,050

3) You should probably recommend she pay the extra taxes now. If the tax were increased by 1.89%. Cindy would have to pay an extra $3640.50 - $2,790 = $850.50 per year for the 32 years before she retires. This adds up to $27,216 over the length of 32 years. On the other hand, if benefits were decreased from 42% of her salary to 29% of her salary the time of Cindy’s retirement (approximations), she would receive $18,900 - $13,050 = $5,850 less per year after she retires. This adds up to $58,500 in just 10 years.

Explanation:

This is the answer they have given me.

Answer 2

1a) 45,000 * 6.2% = 2,790
1b) 45,000 * (6.2% + 1.89%) = 45,000 * 8.09% = 3,640.50

2a) 45,000 * 42% = 18,900
2b) 45,000 * 29% = 13,050

3) I think it would be better to have an increase in Social Security tax now and receive 18,900 as annual pension rather than the decrease in Social Security benefits when she retires.