I see that I reacted too quickly and used a loaded word. I do not believe that SS is literally a pyramid scheme, nor that the government is perpetuating a fraud. I do understand, however, FatBaldGuy’s cynicism. There are historical issues with the system. Even in 1998, after the 1983 reforms, the GAO issued a report(PDF) saying
At that time, the bleak outlook might have appeared to people who had been diligently paying their OASDI taxes that they would never enjoy the same benefit that they had funded for others. In a later publication(PDF) from 2005, GAO went on to predict that
These projections perpetually add several years to the predicted demise of funding. If the GAO had made predictions in 1850 about traffic in New York City, they would have said that by 2010 it would be impossible to remove all the horse manure. So one might be tempted to take such projections with a grain of salt. But it can still be cause for concern to the average citizen who reads about it in the news (like me). And it is consistent with my description of the situation, aside from my use of the p-word. Nevertheless, as you say, with sufficient political will the government has the authority to simply tax at whatever level is necessary to fund the program, together with reducing benefits.
I didn’t take the time to work this out but there is an online calculator provided by SSAthat can probably answer the quantitative part of the question.
Curiosity got the better of me. Earning $20K for 10 years starting last year, $376 a month. At $100K, $1019 a month, factor of 2.7 (not 5). Don’t know the formulas they use or the rationale.
Here is some information about how it is actually calculated but still doesn’t give the “why.” I imagine it is analogous to how the IRS provides forms and worksheets to implement certain formulas. The formulas are pretty clear but to understand the source of the formulas you have to delve into the tax code. To understand the tax code–well, the rationale for the tax code itself is a much stickier matter to unravel.
Exactly. SCOTUS decided years ago that Social Security system is not insurance. If it were insurance, it would be contra to the US Constitution. And, as Markxxx noted, he got benefits based on the earnings of the primary insured individual. Childen under the age of 16 (was at one time 18), widowers/widows, and a few others can get benefits based on a PIA (primary insured amount) of a relative, without ever working (“survivor benefits”). So, it is the single person who gets the least amount back.
Interestingly enough, when I inputted an annual salary of $300,000, the following note was displayed “Note: For your benefit calculation, we limited your earnings to the $106,800.00 taxable maximum for 2010” and the benefit it said I would be entitled to in the year 2046 in 2010 dollars was $2,325 per month.
FICA “taxes” are only on $106,800 for 2010. Everything you earn above that is not subject to FICA, and hence not computed in your SS benefits.
What the … !!!
Not exactly. Too many factors: survivors who may be entitled (dependent children, widow/widower over the age of 62 (50 if disabled), a surviving divorced spouse together with a widower, etc. SS sends you an estimate for your benefits at full retirement (deduct 5/9% a month for early retirement), but you can die before that, or become disabled. If you become disabled, you will get benefits based on early retirement. If a dependent child becomes disabled before reaching age 21, he or she will be entitled to benefits for life, or until is disability ceases.
Okay, what’s the ROI to you on your marriage? your children? your local fire department? I don’t intend this as polemic but as illustrating the point that not everything can be conceived of as having a ROI – while Social Security functions largely as an old-age pension, it’s a tax and an associated entitlement. It’s intended to ensure that no one is in penury – not to replace entirely retirement plans etc.
Granted a figure for what people pay in in FICA taxes vs. what they likely will draw after retirement given actuarial assumptions cam be generated, it is in my mind not legitimate to compare this with retirement plans, because their intent and functions are significantly different.
One can calculate the ROI on these things if one really wants to. It’s not impossible. Just because it comes across as inhuman doesn’t mean it can’t be done.
The same flaw with ROI exists in the opposite direction. Can you calculate an ROI on a USA savings bond? You spend $100 and you get $105 at maturity. Is the “ROI” really 5%? No, because with that bond, you also got to express your patriotism and enriched the country by temporarily loaning your money and how can you put a price on that? Since all the “benefits” of savings bond can’t be quantified, the ROI for USA savings bond is flawed and pointless.
This doesn’t matter. If someone wants to frame it as an ROI, he can calculate an ROI. Now, whether one should frame it that way even before putting pencil to paper is separate issue.