Footnote to The biggest bailout yet

Cash flow and trust fund balance projections are from "Operations of the Combined OASI and DI Trust Funds, in Current Dollars," Table VI.F8 (intermediate case), in the 2009 Social Security annual trustee reports. We calculate cash flow by comparing the "income excluding interest" column with the "cost" column. In some earlier trustees reports, this table had a different ID number.

A special online version from the 2009 report can be found here.

I assume that the employer's half of Social Security tax comes out of workers' pockets, which students of the program generally consider to be the case.

When Social Security calculated the value of the benefits my wife and I stand to get, and the accreted value of our contributions, it assumed that I will earn the full $106,800 of "covered wages" in both 2009 and 2010, and that my wife won't have any covered wages. I could start receiving full benefits -- though I won't take them if I continue to be employed -- on Nov. 1, 2010. However, the monthly benefit would change on Dec. 1, then again on Jan. 1, 2011. So for simplicity sake, we decided to treat Jan. 1 as my retirement date.

We assumed that all the taxes paid by my wife and me and our employers were invested in the Social Security trust fund, that the Consumer Price Index will rise 2.8% a year, and the trust fund will earn 2.9% above inflation, for a total return of about 5.8% (1.028 X 1.029, compounded semi-annually.)

Here's the breakdown of tax payments and their value for my wife (who hasn't worked outside our home since our first child was born, in the 1970s), as calculated by Social Security. As you see, even though my wife has accrued no benefits independent of me because she didn't work enough calendar quarters, the taxes she paid amount to a considerable sum to Social Security.

The value of our benefits don't include any allowance for the disability and survivor coverage that applied when our children were young. That insurance was extremely valuable to me, because it allowed me to purchase less life insurance and disability insurance than I would have otherwise bought.

Value of benefits
Allan Sloan (old-age): $350,443
Nancy Sloan (spousal & survivor): $249,850
Total: $600,293

Taxes paid as of 12/31/10
Allan Sloan: $268,205
Nancy Sloan: $3,303
Total: $271,508

Accrued value of taxes on 12/31/10
Allan Sloan: $758,054
Nancy Sloan:$46,632
Total: $804,686

The Vanguard annuity, which Vanguard priced for me, is a joint-and-2/3 survivor, designed to produce the same monthly income as our Social Security benefits, and has a CPI adjustment almost exactly the same as Social Security's. As with Social Security, after one of us dies, the survivor would get two-thirds of the payment we got as a couple.