I´d say state maintained pension systems are insurance against struggling to survive after a lifetime of working, insurance against old-age poverty. And as such that created an entitlement to get more than you paid into it if you have bad luck. Just as every other insurance.
Not everyone has luck when it comes to career, and there is luck involved. No idea how the US pension system works, but here i have to put in 40 full years of employment, which is tough to fit between University and retirement age for some people (e.g. those that learn a trade and get a master after that), and when you have worked a shorter time, you don´t get your full pension.
If pension is insurance, are you entitled to still get money out of it even when you technically don´t need it? Are you entitled to get inflation re-reimbursed? Are you entitled to gain interest on your payments?
Think of Social Security as an “solidarity” or “insurance” part of your pension, which does have a specified benefit at the time you retire. Not unlike most European countries really. Yes, there is inflation protection - SS benefit gets adjusted annually for cost of living. It’s not like contribution - where the money is yours and you can withdraw it. This money is not yours until you get a benefit payment, hence there is no notion of “interest on your payments”.
Monthly pension is computed based on your own wages and contributions from those (earned income). There’s also max amount of income that’s insurable (currently 128K USD per year). Business income (K1 and other dividends) don’t count. Formula is rather complex. SS system takes 35 years with maximum earnings. What matters is ratio of your insured earnings vs maximum insured earnings, there are also multupliers - earlier years matter much more than later years.
Last time I toyed with SS calculator, my findings are:
- If you had a great salary from age of 23-24, then within 12-13 years you will have earned about half of max SS pension (which is already above average SS benefit). Having max earnings towards retirement will have limited impact on the resulting benefit.
- Smaller earnings when you are a student are generally a wasted money.
- Once you banked all of your SS years (or are close), you are better off being paid as a pass-through business, which avoids SS taxation on K1 dividend (profit distribution).