So lucwarm, are you basically arguing that SS is a mandatory insurance against financial ruin?
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Do we have any reason to believe this other than your say so? (ie. Cite?) The problems with Social Security and generational accounting are more than “fearmongering,” they are right there in the numbers.
More than that. While SS certainly gives some extra protection to those who lose their retirement savings through no fault of their own, it also protects old people who don’t save adequately for retirement; who live significantly longer than they expect; who become unable to work; etc. (and who don’t have children or other people to rely on)
There are still those people, numerically a lot of people, who earn a pretty good wage but don’t have the sophistication* to invest wisely. They will be at the mercy of advisors and/or those who do know how to invest, and their loss will be others’ gain. The money they now pay into SS, they’ll hand over to the sharks. They’ll wind up old and homeless. Tough luck?
*ignorant about money matters and investing, and don’t have the capacity to learn these things.
I agree, that’s a serious problem. The only saving grace, the only glimmer of hope, is that private investment is so much superior to Social Security returns that it may be possible to charge younger workers a payroll tax sufficient to pay current beneficiaries and still have enough left over to allow them to begin building private accounts. The longer we put off dealing with this, the more intractable this problem will be.
Social Security is “redistributionist” only in the sense that it punishes lower income people, over the course of a single lifetime, slightly less than it punishes higher income people. We saw using Debaser’s numbers how we would be six times better off with private investment. For a lower income person it might be 4x, for higher income 7x.
If we consider intergenerational transfer, the situation is worse. Social Security leaves you with nothing to pass on to your heirs. Higher income people can pay the tax, and save and pass on something anyway. Lower income people can’t. Social Security inhibits working-class wealth accumulation.
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According to Social Security Administration projections, benefits in 2045 will equal 17.8% of payroll. So you can, if you wish, keep the program running (without a deficit) just by raising the payroll tax from 12.4% to 17.8%. But now it’s an even worse deal. Private investment would be ten or 12 times better. How bad a deal does Social Security have to become before you’ll stop supporting it, or at least consider alternatives?
I don’t share your condescending view of working Americans. A lot of lower middle class people bust their chops to save up a down payment and buy their own home, even though in the short run renting is easier and cheaper. They have the financial sophistication to understand the benefits of home ownership, and I think if we give them the chance they’ll have the sophistication to do better than the absolutely miserable returns provided by Social Security.
Well, on a certain level, the program is redistributing money from the young to the old. And in a certain sense, that doesn’t make any sense, because young people are little old people.
Cite? Given how many more baby boomers there are than those of us under 30 it doesn’t seem logical to conclude that the system will be able to function in 20 years without impoverishing those still working, or reducing the benefits for seniors to an even more laughable amount than they recieve now. Unless that alchemy thing pans out I can’t see the system supporting me in 41 years…
Well, to start with, Social Security was never intended as a mandatory pension plan – it’s merely evolved into a semblance of one over the years. It was, in origin, a tax on wage-earners for the specific purpose of funding old-age pension-style income for people who expected to have to go on working until they could work no more. The idea was that continuing the tax as each generation approached retirement age would create a sinking fund in which each generation paid taxes to support the previous generation’s pension grants.
It’s worth noting, w/r/t the calculations of the OP, that SS taxation was increased gradually but steadily to build up a surplus to enable the baby boomers to receive benefits, since at the time of their retirement there would be insufficient income from wage-earners to continue paying benefits to all eligible retirees at any useful level.
(And none of this takes into account SS disability, a completely separate question.)
I’d also point out that there are people who may have the sense to invest and do it wisely who, through no real fault of their own, have no retirement savings – because their broker invested a chunk of it in Enron, for example, or in my case, because I sold off and drew down all my I.R.A. over the past eighteen months, for needed income.
<< Then Debaser is paying $6,340.24 per year in SS taxes.
The compounding factor for 41 years @ 7% is 214. 61.
So he would have $1,360,679 in current dollars upon retirement.
SS will pay $19,332 per year for 25 years.
The annuity factor for 25 years @ 7% is 11.65.
Ergo the SS benefit is worth $225,287 as a lump sum. >>
Whoa! I call a foul! You’re applying a “compounding factor” (the time value of money) to the costs, but not to the benefits. That’s a grotesque distortion – pretending that some money increases at an investment rate of return, but that other money stays fixed for 40 years. Sorry, but you can’t apply 7% inflation to wages and pretend that social security benefit won’t ALSO increase by some amount.
Currently, although the projections assume that earnings are all level, in fact social security benefits are increased by a cost-of-living amount each year – both before and after retirement.
Let’s say that social security only increases at half the 7% earnings rate, or 3.5% a year. Then the corrected figures would be:
Debaser is paying $6,340.24 per year in SS taxes.
The compounding factor for 41 years @ 7% is 214. 61.
So he would have $1,360,679 in current dollars upon retirement.
SS will pay $19,332 x (1.035)[sup]41[/sup] in the year of retirement, or $79,219 that year. The benefit will further increase by a cost-of-living factor each year after retirement, let’s keep it at the same 3.5%. Then the annuity factor for 25 years @ 1.035% is 16.48.
Ergo, the SS benefit is worth $1,305,530 as a lump sum.
That’s not such a terrific “loss.”
And there are a number of assumptions that are not taken into account in this calculation:
- Social security includes a life insurance and disability benefit, which makes the contributions for retirement less.
- We’ve made the assumption that Debaser is single. If he is married, then the retirement benefit is increased… and continues longer. I’ll shrug that this is additional life insurance benefit, but it’s a tidy sum.
In fact, social security (if it continues at the rates and benefits that Debaser is complaining about) is probably THE best investment around, in terms of stable, almost guaranteed returns on your contributions.
Well, in a way, you can. My husband is employed by the state, and thus pays into a state retirement system, rather than Social Security. As I understand it the benefits are better, but word ‘round the campfire is that the Social Security Administration is salivating over the money in the states’ systems, and at some point may “absorb” it, and force state employees into the federal Social Secuity system.
You all do realize, I hope, that the Social Security “trust fund” is a total scam, that all of our Social Security money goes straight into the general fund, and that all expenditures on Social Security come straight out of the general fund?
This is the reason why other people contributing to this thread claim that Social Security cannot survive. It’s simple math: currently there are three people paying into Social Security for each person receiving benefits. As of 2012, the ration changes to 2:1 when the first of the boomers hit 65. When the bulk of the boomers are receiving benefits, in 2022, the ration will be worse yet, possibly 1:1.
So if I contribute $1,000 per month in Social Security taxes and my employer matches that number – simple numbers for simple calculations – the federal government will have $2,000 to spend on retirees. How many retirees will I be supporting in 2012? One-half of one retiree, if that retiree is receiving just $2,000 per month. (I know my mother is receiviing $2,000 per month today from Social Security.) Cost of living adjustments will drive up the benefits for retirees presumably at the same rate as inflation; in other words, that’s a wash. But the number of people paying in has to be greater than the number of people receiving benefits, or the system will collapse.
Well, if we immediately stopped the 12.whatever% payroll tax, suddenly we would find a lot of extra money sloshing around in employed person’s pockets. Which would most likely mean higher prices, since people have more cash to chase the stuff with.
So I agree with the “it sucks, but we’re hooked” because to get out of it would increase inflation. And to do some sort of “privatization” would probably yield equivalent results in the markets, i.e. price inflation, where stocks and bonds soon become so outrageously valued that 12/5% returns are a thing of the past.
I think your reasoning is faulted. That “extra money” sloshing around in the young worker’s pocket is no longer in the retiree’s pocket to be spent. Same amount of money in the system, just a different pocket. It might even stimulate the economy, as young workers are earning money, and more of it is likely be invested, stimulating the economy. Retirees, having fixed incomes, spend more of it on day to day expenses.
jklann sez;
Condensending view, my butt. Don’t try that ol’ switcheroo on me, little buddy. Busting our chops, indeed.
I are of the working class, and I’ll tell you that buying a house and investing money wisely are as alike, well, apples and oranges. There’s virtually no risk in buying a home to live in. We’re basically babes in thew woods when it comes to financial markets and the like. We’ll have to hire someone to guide us, and there’s the problem. There are a lot of grubby little fingers out there just dying to get ahold of the money currently being paid into SS.
I’m not applying 7% inflation to wages. I’m applying 7% growth over and above inflation to a diverse portfolio of long-term investments.
If SS didn’t exist, Debaser would be investing the amount he currently pays into Social Security taxes. His investment in stocks or bonds, over the long term, would grow. In both the SS and “private investment” scenarios, we’re assuming his salary stays constant in real terms.
As with the OP, you are criticizing SS as if it is a retirement savings program like a 401(k). It isn’t and never was.
Let me give you an example: Through income taxation, my parents put thousands of dollars into AFDC. They didn’t get back one dime. From this perspective, AFDC is a really bad “deal.” So what? The whole point of wealth redistribution is that money goes from one group of people to another.
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Frankly, I don’t care how bad of a deal SS becomes. Anyone who thinks that SS is a “deal” (like investing in the stock market) is completely missing the point.
The question to be asked is whether SS is serving its purpose in a reasonably adequate and efficient manner.
Let’s face reality: A significant percentage of Americans will not prepare adequately for retirement, if left to their own devices. Do you honestly dispute this?
I do not. I say let them starve, and let the old people who depend on social security starve, and let anyone who can’t pay for his own meals, find someone to pay for them, or make their way to a shelter starve.
If you think that is horrible and inhumane, you are entitled to your opinion. But what gives you the right to take my money to feed said people?
jklann: << I’m not applying 7% inflation to wages. I’m applying 7% growth over and above inflation to a diverse portfolio of long-term investments. >>
Yes, you’re assuming that Debaser can put his money into a fund that earns 7% each year for the next 40 years, but that his salary (and social security benefits) stay flat. You’re still only applying it to one side of the equation – you’re applying it to the contributions (wages) and not to the benefits. You’re still taking social security benefits as being FLAT, and not being increased by inflation.
And, if you believe that long-term investments can earn an average annual 7% over inflation over a 40 year period, you’re being hopeless idealistic (on the one hand) or deliberately distortive (on the other.) With those kind of assumptions, did you used to work at Arthur Andersen’s actuarial department?
You will note that an assumption that long-term investments earn 7.0% of which 3.5% is inflation (cost-of-living) produces an almost even break scenario.
Economics and actuarial science aside, no politician or president will be able to dismantle social security. The AARP is the most powerful lobby in the U.S., and dismantling social security would arouse the anger of way too many voters.
President Reagan passed massive social security reform legislation in the 1970s. One of those features was to gradually increase the social security retirement age – beginning in 2003 and continuing gradually for the next 20 years or so. THIS JANUARY, the first batch of retirees had to wait until age 65 and 2 months before receiving full benefits… based on legislation passed about 25 years ago.
We may find a few politicians/presidents who try for long-range changes, but there won’t be a dramatic dismantling. Not if that politician wants his/her political party to ever win another election.
Can I take it that you disagree with the principle that government can and, when appropriate, should tax people and spend the proceeds for the sake of the public good?