There are many articles which say that Social Security is a bad deal. I have written some of them myself. For younger workers Social Security is not terribly different from spending a quarter to buy a dime. It is difficult to tell people with a straight face that is a sensible transaction.
Yet, Social Security is a financial system which basically takes a dollar in and ships a dollar out. Contrary to popular mythology, it isn’t as though the money was siphoned away to pay-off wars and to provide comfortable housing for idle drug addicts. Someone has to make money if someone else is losing it.
In looking at what Social Security provides and what it costs, I confess I am a bit of a moocher. Statistically I am likely to make money on the system. I had a shorter working career, and married later in life. Understanding what makes the system work for me is likely a sound starting point for understanding why it does not work for the vast majority of Americans.
In terms of cost, my contributions measured in actual investments shows that Social Security will have cost me by the time I am 67 roughly $1 million (in 2014 dollars) in savings. My projected Social Security benefit is $1,250. That sounds like a losing proposition.
Here is a specific example. In 1990, my contribution to Social Security was the maximum $5, 437.80. Invested in the Vanguard 500 Index fund, that sum would be worth more than $57,000 going into 2015. Given 13 more years of investment, that investment would grow to nearly $100,000 by 2028.
So what happened to the cash? The cash that I paid to Social Security went to existing beneficiaries, in part to my father. My father in turn gave me annual stipends which in some years offset the entire cost of FICA. He even called it my FICA rebate check. So the cash simply went in a circle from me to Social Security to my father and back to me.
While I am not 67, I already enjoy one of the lesser discussed retirement benefits – free life insurance. I qualified for Social Security many years ago, but only recently married and had children. The Survivor benefits from Social Security spare me the need to buy life insurance. That benefit saves me roughly $1,000 a year unless I take up cave-diving and drag racing in which case the savings are even more.
While your parents and in-laws may not send you a rebate check, the liquidity provided by Social Security protects their asset base. If you inherit assets from someone who has been retired for any length of time, it is likely largely in part to Social Security which provided the predictable liquidity to protect their asset base.
Many on the internet believe (and spam) the idea that they would be millionaires if they had been allowed to save their future without the interference of government. It is possible. Of course, they fail to factor in the incremental support that they would need to provide for their parents, in-laws, and step in-laws. This is what Ronald Reagan meant when he said, ‘the nine most terrifying words in the English language are: I’m your mother-in-law, I need a place to stay.’
By the time I am 67, Social Security will certainly have returned all of the contributions that I made over my lifetime. If the system is still around at that time, I will draw the equivalent of roughly $1,250 a month. When I die, my wife who is younger than I am may well draw benefits until 2060 based on her life expectancy. I haven’t had a job in 15 years, and well may not again unless the issue of Social Security creates sufficient interest to support a writing position for me.
I am not the largest mooch by any means. There are workers, like Pete Stark, a man wealthy by Congressional standards, who more clearly demonstrate the real earning power of Social Security. He has 2 ex-wives, either of whom may be able to collect under his contributions. His current wife is eligible to collect as the mother of his 4 minor children, who are already collecting. She also may well collect benefits under his contributions past 2050.
The structure of Social Security is simple: dollar in and dollar out. It creates almost no economic wealth with which to pay positive returns. The only way to give me a bonus, and someone like Pete Stark, more than we contribute, is to pay others less. The others traditionally have been future workers.
The system desperately needs reform, unless you feel that the government should impoverish future workers for the benefit of me and the Pete Starks of the world. Americans are living longer. It makes sense to increase the retirement age – which we have already done. It makes sense to increase the number of quarters to qualify and the number of years to weight in the formula. And we need to revisit the idea of early retirement.
We need to look at reforming the freebies that Congress has embedded in the system over the years. In a world, where fewer couples are supported by a single income, spousal benefits do not make a lot of sense. The structure makes sense if the goal of the system to subsidize the trophy wives of the wealthy. We should separate survivor benefits into its own system, and require people pay for these benefits if they want them.
Yet, any reform is met with a scorch-earth resistance from the left, which pretends that Social Security is a safety-net for the poor. We are subjected to lectures about grandmothers being run-over by a bus, when the outcome of the resistance is that a future grandmother will be hit by a larger bus. It is hypocrisy at its worst.
Today the system is broken. Instead of talking about how to fix the brokenness, Congress is looking for a way to pay for it.