2024 ASEE Annual Conference & Exposition

One of the most common taxes is the Federal Insurance Contributions Act (FICA), which we often know as our social security tax. Nearly three quarters of taxpayers pay more in FICA taxes than they do in income tax. These taxes determine the social security benefits that an individual can receive, and the earning record determines whether an individual qualifies for Medicare.

This paper’s analysis is presented from the perspective of a graduating engineer, so that it can be used by faculty in their classes. The case can be analyzed by students individually or in teams. It uses key concepts and tools from engineering economy. Because the data is publicly available, case studies can be structured for students to identify what data are needed and where to find it.

Social security is rarely viewed as an investment, but withheld FICA taxes are the investment that pays for our social security benefits. Most of us will pay into FICA during an entire working career, often with no expectations of a good return. Many younger individuals believe they will receive no benefit due to media statements that the system is or will be insolvent. This paper demonstrates that for many people, social security is a good investment.

Since most retirement systems are now defined contribution, social security has additional importance as an example of how to determine the value of a defined benefit pension. Social security is the centerpiece of retirement planning for most Americans. Engineering economy students have the tools to analyze this aspect of their futures. Engineering economy professors have the responsibility for helping students to achieve mastery of the basics for retirement financial planning. The rate of return on our tax investment is demonstrated as a real example of time value of money and personal financial planning.

While the analysis is applicable to the U.S. social security system as it is defined today, our methodology is applicable to other defined benefit systems. The approach is also applicable internationally, as most countries have some form of public pension system.