Managing Money : Social Security Pay-Ins Have Soared Over Years

QUESTION: Is it possible to determine the maximum amount an employee would have paid into Social Security from the time the program started through the end of 1988? I’m assuming that this employee paid the maximum amount for all these years and am not including any contributions from the employer. I have made a bet that the contributions don’t amount to $50,000.--W. C. J.

ANSWER: Before answering, let me first say that your columnist is generally not inclined to settle bets in the newspaper. Too many years of sitting too close to a sports department--where all manner of barroom bets were settled with a call to the local paper--have soured her on using the press for such matters. However, because you have raised an interesting question, an exception is granted.

According to the Social Security Administration, an employee who started making the maximum allowable contribution when the pension system began in 1937 would have contributed a total of $34,166.99 over the next 51 years. By contrast, at today’s maximum annual contribution level of $3,379, it would take about 10 years to accumulate the same amount.

The reason for the relatively low level of accumulated contributions in 51 years stems directly from the almost negligible taxes assessed by the system in its first several decades. For example, from 1937 through 1949, an employee’s maximum annual Social Security contribution was $30. (Yes, just $30!)

Starting in 1950, contributions gradually increased. Still, by 1960, the maximum was just $144 a year. By 1970, the level was $374, and from that year on, contributions began to increase more steeply and more regularly. By 1980, the maximum contribution was $1,587. None of these figures take into account the matching contributions made by employers.

At the same time that the maximum tax has increased, intermediate levels have been adjusted as well. For example, from 1937 through 1949, workers paid 1% of their first $3,000 in earnings. In 1950, that was changed to 1.5% of the first $3,000. In 1951 and every few years since, the percentage as well as the taxable base has been increased. In 1960, workers paid 3% of their first $4,800; in 1970, they paid 4.8% of the first $7,800. In 1980, the contribution was based on 6.13% of the first $25,900. The rate currently stands at 7.51% of the first $45,000 in earnings.

The Social Security Administration is quick to point out that benefits have increased as well. The same employee who contributed $34,166.99 over a 51-year career would be eligible to receive $838 a month, and, at this rate, it would take about three years and five months to recoup the employee’s share of the contributions.

Q: I was employed for many years by a large corporation, but I left in April to start my own consulting firm. During the years that the tax laws allowed me to make fully deductable contributions to an individual retirement account, I did. My IRA account offers me a good rate of return. Now I understand that I am eligible to open a Simplified Employee Pension IRA. May I designate my original IRA as my SEP-IRA and make my contributions to that account?--G. L. O.

A: Yes, you may designate your original IRA account as your SEP account. However, you should check with your savings institution to see whether the terms of your original deposit allow you to make additions to your original account and whether any additions will earn the same interest rate as the original contribution. Some accounts allow additions to earn the interest rate of the original contribution; others do not.

A follow-up to last week’s note on U.S. savings bonds. Three days ago, the Treasury Department announced that it will close its 4-month-old program that allowed investors to buy Series EE bonds over a toll-free telephone line and charge the purchase to their MasterCard or Visa cards. The program will end Sept. 30.

A spokesman for the department’s savings bond division said fewer than $5 million worth of the bonds were sold over the telephone since the program began in early May. By contrast, he said, the government has been selling an average of $600 million worth of the bonds per month in recent months.

Until its closure, bonds may be purchased by calling 1-800-US-BONDS. The line is staffed 24 hours a day, seven days a week. There is no additional charge to the buyer for the telephone and charge service.

Carla Lazzareschi cannot answer mail individually but will respond in this column to financial questions of general interest. Please do not telephone. Write to Money Talk, Business Section, Los Angeles Times, Times Mirror Square, Los Angeles, Calif. 90053.