In the first article of this series, I made the case that Social Security is a broken system that requires a pressure release valve, in the form of an opt-out provision. In this second article, I show in greater detail just how bad a deal Social Security is for individuals like you and me. by Walt Thiessen
(libertarian)
Thursday, October 4, 2007
The dirty little secret of politics is that Social Security is broken and shouldn't be fixed, although neither most Republicans nor most Democrats are willing to admit it. Instead, they all want to preserve Social Security despite the overwhelming evidence that speaks against it as a program. That was the focus of my previous article on the subject 10 days ago. Today, I want to show in dollars and cents just how bad a deal it really is for you and me.
Every year in late Winter or early Spring, the Social Security Administration mails our Social Security Statements to us. Most of us ignore them. Many of us throw them in the trash (which is appropriate, in my opinion). But for the past two years, I've been hanging onto mine just for the informational value they provide in showing us how bad Social Security really is.
My own statement shows that I've been earning a living steadily since 1980, although I earned my first paycheck in 1976. From that time through 2005, they list all of the taxable Social Security income I've reported via my income tax return. It shows that I've had a total of $89,335 collected from me and my employers over the years in the form of Social Security withholding taxes. Mathematicians out there will be able to quickly determine that I'm no millionaire.
Looking at my Estimated Benefits section, when I retire at 66 years and 6 months, my monthly payment will be $1,762 a month. Well, that's certainly not going to pay the bills, but that's only a small piece of the bad news. There's an asterisk next to this and all of the subsections under this section. When I check the asterisk's meaning at the bottom of the section, it says:
"Your estimated benefits are based on current law. Congress has made changes to the law in the past and can do so at any time. The law governing benefit amounts may change because, by 2040, the payroll taxes collected will be enough to pay only about 74 percent of scheduled benefits."
Terrific. I'll definitely be in my old age by that point (if I'm not dead already), yet I know that my $1,762 a month is already reduced to $1,303 a month. And that's just so far. We aren't even out of 2007 yet. Since Congress isn't talking about reducing anyone's benefits and likely won't do so for another 10 years until 2017 (when the program becomes officially insolvent), it's very likely that my benefits won't be anywhere near enough to live on after 10 more years of Congressional kowtowing to AARP and senior citizens.
Let's see now: I'll be 66 years and 6 months old in November 2023. Swell, right in the middle of the chaos. It's likely that my permitted retirement will be officially delayed by Congress before that time, probably til at least age 70 (which for me is the year 2027). But just for laughs, let's hope against hope that I'm actually permitted to retire at 66 1/2 years old. How long should I expect to live from that point on? Well, according to the CDC's National Center for Health Statistics in 2005, white males like myself are expected to live about 75 years here in America. That leaves me 8 1/2 years to collect Social Security. That's 102 months. Multiply that by $1,303 per month, and I'll collect a total of $132,906 during my retirement if I live to exactly 75 years of age. Some would say that's not a bad return on investment of $89,335, but wait a minute. I forgot to include the money I'll earn between now and retirement. That adds another $44,369 to my Social Security withholding taxes according to my statement's assumptions. Add it to the amount that I've already had deducted from my pay and it totals $133,704. So if I retire at age 66 1/2, I experience a net loss of $798.
Except that it's even worse than that. We all know that passbook savings accounts are just about the worst form of investment there is. The reason I'm choosing it for comparison to Social Security is that a bank savings account is safe. Most people agree that a passbook savings account is the safest way to save your money. If I had been permitted by the government to redirect that money forcibly taken from my paychecks into a simple bank passbook savings account at 5% from 1980 through 2005, how much money would I have today?
I created a little spreadsheet to figure it out. It turns out that even if interest is compounded annually (most interest is compounded quarterly or monthly at most banks, which results in a slightly higher yield), I'd have $150,717 in the bank for my retirement right now, rather than $89,335 in my Social Security statement. Best of all, the money would be mine, whereas my future Social Security benefits are not my property according to the U.S. Supreme Court.
What if I continue to be permitted to put the future $44,369 that the Social Security Administration estimates will be taken from my paycheck from now until I retire and add it over time instead into my hypothetical bank savings account that I hypothetically started in 1980? It turns out that by retirement I'd have $461,614 in the bank rather than $133,704 in my Social Security statement. Isn't compound interest amazing!
So now, under our imaginary scenario, if I retire in 2023 and live only until age 75 exactly on $1,303 a month withdrawn from my savings account (just like Social Security claims they would likely pay me), and if I keep the remaining money in the bank savings account at that same 5% level, how much will be left over when I die? My spreadsheet tells me that I'll still have $555,255 left over.
Huh? How can that be? I only had $461,614 when I retired (which I must say is considerably better than the $133,704 that Social Security said I have to my credit under their plan). Where did the exra 90 grand come from?
Well, just because I retire doesn't mean that I don't keep earning interest on my savings account. I've reached the point where my interest on my savings actually exceeds what Social Security would pay me! In fact, I could try to live to be 100 on that same $1,303 a month (if you can call that living) from my savings account that Social Security would have otherwise allocated to me. My spreadsheet now tells me that my hypothetical savings account plan for retirement would have left me with an estate of $1,134,029 if I die at age 100 after spending that same $1,303 a month. Of course, under Social Security, when I die I get nothing left in my estate.
Are you beginning to see just how bad a deal Social Security is? Wait, it gets even worse! It turns out that Social Security's insolvency pales compared to the coming Medicare insolvency, which is compounded even further by America's overall coming insolvency. As I noted in my first article on this topic, U.S. Comptroller David Walker is pointing out today that by 2040 there won't be any money left to pay for anything but Social Security and the National Debt. Which means that money available for Medicare will be $0 and money available for all other government programs (including national defense) will also be $0.
Why do I get the feeling that my already measly Social Security check is going to be cut even further, whether Congress wants to or not?
Many self-described "experts" claim that Social Security is necessary because people are terrible at saving for their retirement. What they fail to mention is that when you take 12.4% of someone's wages from them and put it into Social Security, you don't leave any money over for savings!
There's lots more that could be said about Social Security, but I'll leave that for another article, another time. I don't think any of us should be made more depressed than we need to be, don't you?
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