On Politics, We Can Always See the Whites of Their Eyes.
Social Security Revisited
by: Clyde Middleton posted: 2009-01-24 09:31:00
Viewed 759 times. 24 Comments.
Can the government fix Social Security? Better asked: Do they have any interest in fixing it? Rather than offer solutions, Liberals repeatedly demonize any attempts to fix the system through privatization. They seek to accomplish the unthinkable by convincing Americans that private ownership is somehow scarier than government ownership. And somehow they (with the aid of the liberal MSM) have succeeded. It appears that they would rather push the issue to the next Congress, the next Administration. But with significant deficits on the horizon, it can't be pushed for long. If Obama has 8 years in office, he will leave in January 2017 - the very year deficits are due to begin. Seems like he has no choice but to address it.
The democrats have executive and legislative control. They now own this issue. President Reagan began the national discussion but only served to mend for a time yet not fix the problem.
"Problem"? Yes. Social Security is a Ponzi scheme as surely as Madoff's $50 billion investment house. Let's go through the cash flow. First, go here if you need a good overview.
Social Security is presently running a "surplus," that is, it brings in more money from our paychecks than it pays out in benefits. Ordinarily, one would think this a good thing - a surplus is invested and those earnings increase the residual through the "time value of money" concept. But there is no investing occurring:
The accumulation of surpluses in the trust fund gives an exaggerated notion of Social Security’s ability to pay its way. These surpluses have been loaned to the U.S. Treasury in order to finance current government spending. In exchange, the trust fund receives from the Treasury nonmarketable securities that are useless as a means of forward funding. These "special issue" securities have no market price (they are not traded) and are backed by nothing of tangible value.
Rather than being placed into an escrow account, every dime of surplus is being used by the government to pay for current non-SS expenses. We've known this for a long time. The concept tossed around of a "lock box" was nothing but political grist. The money is ponzied through the government. How much cash is the government siphoning, and when will it dry up? Here's some selected years (Actual and Estimate (e), US$ Billion):
| Year | Annual Revenue | Annual Cost | Difference |
| 1960 | $11.90 | $11.80 | $0.10 |
| 1965 | $17.20 | $19.20 | ($2.00) |
| 1970 | $34.70 | $33.10 | $1.60 |
| 1975 | $64.30 | $69.20 | ($4.90) |
| 1980 | $116.70 | $123.60 | ($6.90) |
| 1985 | $197.50 | $190.6 | $6.90 |
| 1990 | $301.10 | $253.10 | $48.00 |
| 1995 | $364.80 | $339.80 | $25.00 |
| 2000 | $504.80 | $415.10 | $89.70 |
| 2005(e) | $596.10 | $526.6 | $69.50 |
| 2010(e) | $773.80 | $682.40 | $91.40 |
| 2015(e) | $978.70 | $947.10 | $31.60 |
| 2020(e) | $1,221.20 | $1,317.50 | ($96.30) |
The government is pulling not quite $100 billion in cash a year right now, and returning IOUs. The consensus from several articles indicates that 2017 is the tipping point between surplus and deficit. According to the link above, 20 years from now, in 2029, the annual deficit will reach half a trillion dollars. That's more than President Bush's last deficit for running the entire government and a couple of wars.
Here's another crack at the some numbers:
$4.0 trillion: This is the net present value of Social Security’s unfunded obligations through 2079. In other words, this is the amount of money that the government would need to have on hand and invested today so that it could make Social Security solvent when combined with the Trust Fund bonds and future payroll taxes.
$5.7 trillion: This is the net present value of Social Security’s cash-flow shortfall through 2079. In other words, this is the amount of money that the government would need to have on hand and invest today so that it could pay Social Security’s promised future benefits through 2079 and pay back $1.7 trillion for the Trust Fund’s bonds.
$5.0 trillion: This is the sum of the payments, in 2004 dollars, that the government will have to repay to the Trust Fund between 2017, when Social Security’s cash flow goes negative, and 2041, when the Trust Fund’s bond holdings are finally spent. In other words, this is the total cost to keep Social Security going even before the Trust Fund is empty.
$12.8 trillion: This is the net present value of Social Security’s cash-flow shortfall: in other words, the amount of the money that the government would need to collect and invest today so that it could pay Social Security’s promised future benefits forever.
$25.8 trillion: This number is Social Security’s total negative cash flow through 2079, in 2004 dollars. It does not account for Social Security’s continuing shortfalls after 2079.
How big are these numbers? The entire GDP of the US is presently $14 trillion. Yes, there's some rather significant numbers on the table. The system as is will not work.
How do they fix it? Increase revenue (up the tax), decrease cost (reduce benefits), or a combination of both. The only other possibility is to phase out the program - further discussed below.
Let's change gears from what the government does to what we get.
Who qualifies for Social Security retirement benefits? "For every $780 of wages you earn in any given year, you get one credit, up to four per year. Once you have 40 credits, you are eligible to receive full benefits when you reach age 65."
What do you get in benefits? The actual amount reflects your earnings (get your individual statement here), so let's go this route - What don't you get? When you die, your Social Security income ends. Why is that important? Consider a person that worked from age 18 to age 60. They paid into Social Security their entire working life, and then die prior to reaching retirement. What do they get? Zero. Sure, I'm ignoring the $300 funeral benefit. In fairness, perhaps their surviving spouse can tap into the benefits if he or she doesn't have their own. But the issue is this: The payments made into Social Security carry no cash value. A person can pay in tens of thousands of dollars over decades and her heirs would receive nothing. My father paid in for almost five decades and got five years of checks.
That is the birthplace of the privatization argument - which is the phasing-out of Social Security. If you have a mutual fund - ignoring Social Security for a moment - when you die, the full balance goes to your heirs. Nothing is lost. Social Security is asking us to trade our cash value for an annuity. Our cash value can create its own annuity, so the trade better be on good financial terms.
Here's the return on investment for the Social Security funds paid in presuming a person lives to the mortality tables. See Table 1 - Present Law Scenario in the link. Of course, if you die before the Actuarial Table says you are supposed to die, well, the return drops - yes, live longer the return increases.
| Career Average Earnings | Year of Birth | One-earner Couple | Two-earner Couple |
| Very Low ($8,314) | 1955 | 6.49% | 4.56% |
| 1973 | 6.15% | 4.46% | |
| 1997 | 6.29% | 4.68% | |
| Low ($14,965) | 1955 | 5.40% | 3.44% |
| 1973 | 5.10% | 3.36% | |
| 1997 | 5.26% | 3.60% | |
| Medium ($33,256) | 1955 | 4.39% | 2.3% |
| 1973 | 4.13% | 2.3% | |
| 1997 | 4.28% | 2.57% | |
| High ($52,624) | 1955 | 3.75% | 1.73% |
| 1973 | 3.50% | 1.68% | |
| 1997 | 3.67% | 1.93% | |
| Maximum ($69,418) | 1955 | 2.88% | ?? |
| 1973 | 2.55% | ?? | |
| 1997 | 2.70% | ?? |
"??" - The source data is blank on these items.
I haven't played with it, but here is a calculator that you determine your personal ROI.
With these income data, it seems that most of us are in the 2% to 4% Social Security ROI range - assuming we live to the Mortality Table.
So here's the comparison: 2% to 4% return with forfeiture of your principal upon death v. market rate of return and keeping your principal upon death. Another comparison is this: Let the government keep your money with a promise to pay you v. keeping the money yourself.
The second comparison is easy. So what about market return? How about lending it to the government with interest? Somewhat ironic. Here's the chart on T-bills:
I'm not running the numbers - eyeball the damn thing - seems historically much higher than Social Security (we know interest rates are artificially low right now), plus you keep all your principal at the end. No forfeiture clause. Die at 40, 60, or 80 - all yours. Mutual funds are available to spread the investment risk. Remember, this is not rocket science - we already do it with IRAs.
Another issue is this: Assume we were private now. From the SS Revenue numbers above, next year we would be pushing almost $800 billion more into the private sector. Now THAT is stimulus we can count on.
Social Security seems to be a good deal for the poor. As poverty is left behind, Social Security is less and less attractive. As a parent, I would rather have that nest egg building to leave my children rather than give it to Congress to build a Mob Museum in Las Vegas.
Tags: social security, Obama, Congress,
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Comments 24
i agree with your sentiments ... but do look at the source data for the ROI. it factors in expected lives according to income, with the lower income folks dying sooner.
i still agree with you. the system is horrible and out of control.
Privatizing social security would prove beneficial only in instances where the market was successful. Retiring during a recession, wouldn’t yield the same ROI as someone who retired during surplus years. You couple that with the idea that each person will now be responsible for their social security, in the sense that there ROI would depend on their investments, and the fact that the majority of citizens who rely heavily social security are not very proficient when it comes to investing… That is not a good combination to start. Lastly, if we started switching to private the government would have to use the money invested by the near retirees now to pay for the switch, or include tax increases, or benefit cuts on today’s youth down the road.
but, sean, investing is not done for 18 or 24 or 36 months - and recessions die out over that time. investing for retirement is done as it is with SS - from age 18 or 22 through 65 or so. recessions are blips. short term events. look at long-term returns.
Right, what I was trying to say was, retiring amid a recession would yield less of a return through privatizing of social security; as opposed to retiring during a surplus years. What you invest currently has a standard interest rate of anywhere between 2 percent (borderline recession years) and 8 percent. Those numbers have been for the last 10 years.
Does that make any sense?
sean, brother, run the numbers and look at the broader picture. assume a flat 5%, and contribute $100 a year. overly simple. $100, $205, $315.25, etc. your point is that at retirement, perhaps the return is 2%. but the money doesn't all come out then! you draw out like an annuity, and returns are back at, for example, 5% within a year.
now, further assume that you have $100,000 in the account at retirement - a very low sum if you think about putting in 6% or so of gross income every year, and earning our example of 2% to 5%. very low indeed.
your recession hits. returns drop to 2%. our guy gets overly emotional. distraught. after 12 months, he has $80,000 left in his account. he's frantic. he takes the cat and a rope into the woods. loved his cat. hangs the cat and himself. daughter goes through his estate. nothing there but an account balance statement.
under my system, she gets $80,000. under yours, she gets a discontinuation of benefits notice.
which do you want?
Sure you will have less of a return during the years that you are actually retired, but it doesn't really matter. As Clyde eluded to, that 40 or 50 years of investing at average market rates (8-10%) will far more cover whatever you aren't going to make during the down years.
Also, any cookie-cutter retirement plan states that you invest risky early and the closer to get to retirement you move your money out of stocks and into vehicles like bonds and t-bills, or even regular money market accounts (essentially savings accounts).
That is a very valid point. Without sounding like an escape artist I will say that SS is flawed. My only worry is that privatizing it would allow another opportunity for the corrupted market savvy to manipulate, control, and take advantage of assets.
How so? Remember that all pensions, 401ks, IRAs, etc. are all in the stock market and bond markets to some extent. Pensions tend to go even riskier with commodities and such.
Those who control their own retirements and are savvy will be better off than those who stick their money in a fund and forget it. But that would be about it.
However, those that stick their money in a fund and forget about it will be better of than those that control their own retirements and are not savvy. I don't know if you can tell, but my expertise in Social Security is severely limited. I'm still worrying about college loans... Undergrad loans... I never try to limit my scope, and hearing points from both sides are crucial to making good decisions further down the road. Thanks again for another informative post.
You are correct and that is why most people don't manage their own funds short of picking a particular mutual fund, and that is ok. Those that wish to manage their own account are looking for a better return, like myself. Sometimes it works and sometimes it doesn't :)
I agree with Clyde here. The worst thing you can do is get into the mentality that you have to pay off the bills first and worry about retirement later. Even if it is only $50 a month, starting early (say in your 20's) is worth a couple hundred if you start in your late 30's or 40's.
Compound interest is a wonderful thing!
welcome, sean. do yourself a favor as you start work. whatever your employer offers for 401(k) matching - max it out. it's free money. further, whatever you make net, from day one take 10% - half into some basic investments (check out dividend reinvestment programs in direct stock buys ... no commissions!) and the other half in some savings account (readily accessible cash). that investment part is never spent - the savings part is emergency money.
when you get a raise - same 10% of net, plus one-third your raise. yeah, you're making not much more than you did before your raise ... but you'll be amazed at how quickly it will build early in life, and how much comfort you'll get out of having it.
not arguing that point, sean. madoffs are out there. but we have the system in place with retirement account now.
the variable is having the requirement to contribute - just like we have now with SS taken out of your check - but that's simple enough. more overhead for employers to send it in different directions rather than just one place, yes, but that's why we have payroll companies. it gets set up and it done.
limits on the type of investment vehicles that can be used - not unlike trust accounts. but again, none of this is new.
my bitch is that the government sucks at about everything it does but defense and the post office. and now they use the money freely as if it were theres AND they keep it if i die young? just ain't right.
Well I still have a few years then. Thanks for the advice.
priorities: retirement, savings, food, bills, new stuff - in that order. stick around for the next few years, we'll get you pointed in the right direction. then you can take us all out to dinner ...
Will do. I just registered, and might I add; funniest terms of service and privacy statement I've ever read.
Welcome aboard Scotty. The lawyers will be happy that someone actually read those ;)
In all seriousness though, I am glad that I will be seeing a conservative viewpoint beyond that of Bill O'Reilly, and Sean Hannity, and the the rest of the superfriends at FNC.
scotty, i shouldn't pride myself on being illiterate, but i can't listen to those folks anymore. i agree with what they say, but it's showbiz now. i want the news - that's it. i rarely watch tv and even less listen to the radio.
i spend several hours every day reading different sites. i am fortunate enough to work at home so i can integrate work with the site freely. i get news, form my opinions, and write about them. glad you are enjoying the mix of folks we have here.
I fear the lefties are going to attempt to convert SS into a means tested welfare program, whereas all recipients will receive the same $ amount no matter who paid in how much.
I agree, Travis. That has always been my belief about where this is going.
Have an opinion?
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another big myth. social security is friendly to the poor.
no it is not, it is a nasty regressive tax.
a ponzi scheme benefiting the wealthy. poor pay the most into SS (% wise) and due to health/life style get the least out of it, as they generally die quicker.
one of the worst systems the government has ever created and supported. 0 redeeming qualities.