Sunday, May 07, 2006

Why I Won’t Be Counting on Social Security

(this one's been simmering a while; we now join this argument, already in progress)

My cubicle neighbor and I argue about discuss Social Security on a semi-regular basis. You see, he’s on the opposite end of the career spectrum from me. He’s only a few years away from retirement while I’m just a few years out of school. He fully expects to get his social security check each month when he retires. And I fully expect him to as well. I just don’t think I’ll be getting one.

Assumptions

The U.S. Government will not collapse and the world will not end before I retire. Let’s face it, if the world ends or the government collapses, Social Security is a moot point. So we’ll just assume the end of the Mayan calendar passes without incident and move on.

I will live long enough to retire. Of course I won’t collect Social Security if I don’t live long enough to retire. So we’ll assume this as well.

Life expectancy will continue to increase at the rate of 1 year per decade. Those who believe we will achieve virtual immortality in my lifetime will think this too conservative. Others who see the obesity epidemic increasing the incidence of life-threatening conditions such as heart disease and diabetes may think I’m being optimistic. So we’ll just stick with current trends.

Given the above, the retirement age will increase to compensate for increased life expectancy So by the time I’m ready to retire, the retirement age will be 70. This means I will retire in late 2050, 44 and a half years from now.

Things working for Social Security’s future.

Entitlement programs are hard to get rid of. This is the strongest argument for why Social Security will still be around in 44 years. It’s politically awkward to tell people that they can’t have the money they’ve been expecting. “My grandparents got Social Security. My parents get Social Security. Why can’t I get Social Security?” And then the politicians scramble to find a way to cover the costs, even if it means cutting national defense (but not their own salaries).

Other entitlement programs are closer to a crisis, so “fixing” Social Security will be put off indefinitely. Medicare and Medicaid are the big money black holes in the budget right now, and they’re getting larger. Who cares if Social Security won’t be able to pay full benefits in 35 years?

No one wants to see old people dying broke in the streets. It’s just creepy.

Things working against Social Security

Social Security is NOT a savings plan. When people talk about Social Security, they often talk about “paying into” Social Security. You are not. You are paying for the people on Social Security now. People still working in the trenches and cubicles after you retire will be paying for your benefits then. And what you get out of Social Security isn’t really based on what you put in, as far as I can tell. (Is it just me, or does this seem like another way middle-income earners are screwed?)

The AARP says that Social Security is just fine – 100% of benefits can be paid out until 2041 (9 years before I'll be retiring) and the government is “investing” the money in U.S. Treasury bonds. But a U.S. Treasury bond is simply an investment in the government. The government is taking tax dollars out of one pocket and putting it into another, with the promise that they’ll pay it back with interest. So while Social Security is taking in more than it’s paying out, the government has a nice little slush fund to dip in to. When Social Security starts taking out more money than it takes in, not only will that slush fund be gone, but general tax revenues will also have to go toward paying off what was essentially a loan. To complicate matters, we’re not the only ones investing in Treasury bonds. Other countries are too. So when they start calling up their debt to pay for their own overwhelmed social programs, we may find ourselves in even greater trouble.


Tax reform. Oh, to have a simpler tax code! It would be nice if there were just a consumption tax, or flat tax for all income (Corporate income? Personal income? Dividends? Capital gains? It doesn’t matter! It’s all the same!). Sadly, you would have to eliminate tax shelters like 401ks and IRAs that encourage retirement savings, which would end up increasing people’s dependence on Social Security. But the payroll tax (some of which goes towards Social Security) would have to be eliminated as well. Then the government would be forced to treat Social Security like what it really is – a welfare program for old and/or disabled individuals or widows/widowers and their children. They would have to pull the costs of Social Security out of the general revenue with no regard to how much each person supposedly “put in”. With the switch in perception from “investment” to “welfare”, people would start asking (more so than they might already) why we’re paying perfectly healthy and wealthy people who happen to be older and not working so much money each month. Which brings us to…

Medicare/Medicaid/Social Security reform. Healthcare costs are increasing, making the need to reform Medicare and Medicaid all the more urgent. The need to reform Medicare and Medicaid sooner rather than later may distract from Social Security’s longer-term problems, or Social Security might just be lumped together with Medicare and Medicaid in the next big reform movement. I think Social Security as we know it – with retirement ages and benefits based on the individual’s average income – could be eliminated, replaced by something that would still provide something when our retirement savings run dangerously low (thus avoiding the “old people dying broke in the streets” epidemic of 2042). Maybe you would just be put on plain old welfare. Maybe you’d have to live in subsidized housing or a government-run nursing home. Or maybe you’d have to go on a crime spree and spend the rest of your days in prison. Rest assured, the government would find something to do with you. But your options would be limited.

I feel more in control of my own savings. Let’s face it, a lot can happen in 44 years. I’d rather save with the assumption that I won’t get Social Security and be pleasantly surprised by the windfall when I retire than assume that I will get Social Security, only to find I’m too wealthy, healthy, or young to get those benefits (or Social Security as we know it is simply gone) when I finally decide to flee the cubicle farm. Yes, I could run into problems of my own that would put a huge dent in my savings. But my hope is that all of the money I’m paying for various types of insurance (which I could otherwise be spending or saving) will count for something.

I’m sure I’ve left something out. But I can always address that in the comments.

7 Comments:

Blogger Jody said...

Added points:

Better return rate from private accounts.

More capital for investment from private accounts => faster growing economy => everyone wins.

Fifty-five weeks of Willisms.

5/07/2006 10:06 PM  
Anonymous John said...

Where to start, where to start? Ah! Let's start with generalities and move to specifics later (or some combination thereof).

The general sense I get of what you seem to be ranting about is that, after all is said and done, you believe that if you managed your own life savings and investments, you'd be better off when you decide to "retire" than if you had not paid any money "into" Social Security? Perhaps the root cause of your complaint is that you seem to be defining social security as being something it is not and then attacking it for not being that.

Point #1 - The money you earned which comes out of your pay check for FICA (social security) is a federal tax. It goes to the government. Some actually shows up in social security checks, but that's only because social security checks are something the Federal Government has to write checks for. It is basically for general revenue purposes.
Totally Separate Point #2 - When you notify the government that you have retired (if you meet age and earnings requirements), you get a check for a specific amount of money every month for as long as you live. That amount also increases with time.

From these points, we can conclude:
Fact #1 - You pay taxes to the Federal government.
Fact #2 - You get a lifetime pension from the Federal government.

So, I note, with all due respect, you have, erroneously, related Fact #1 and Fact #2. There is no connection between the tax called FICA and your pension from the federal government called Social Security.

I shall post more as I have time.

- John

5/08/2006 8:35 AM  
Blogger SpakKadi said...

John,

Ding! You said the magic word! Pension! We see how well pensions are working out for private industry. Social security attempts to be a pension plan for everyone. But at least private pension plans set the money aside and invest it in something other than company stock. The government is basically taking the money, spending it now (part of that expense is paying current retirees) and saying that, in exchange, they'll take care of us when we're old with future taxpayer dollars.

Here's what the Social Security Administration itself has to say about those Treasury Bonds in the Social Security trust fund:

"Since neither the interest paid on the Treasury bonds held in the HI [Hospital Insurance] and OASDI Trust Funds, nor their redemption, provides any net new income to the Treasury, the full amount of the required Treasury payments to these trust funds must be financed by some combination of increased taxation, increased Federal borrowing and debt, or a reduction in other government expenditures. (Status of Social Security and Medicare Programs: A summary of the 2005 annual reports)

As to FICA: yes, the money ends up in general revenues. So why bother having a separate income tax for it that only applies to the first $94,200? It's all a name game to make it seem like it's separate pot of money, but it's not. And as far as I can tell, what you get out of Social Security is based on your average income prior to retirement, not your average FICA contribution. This seems wrong, but I can't find a clear definition that says "average FICA taxable income". The calculation heavily weights lower amounts of income so that those with smaller incomes will receive a higher percentage of their working income upon retirement, but income above the FICA limit still appears to be included (though at 15% as opposed to 90%). The links to those calculations are in the post.

5/09/2006 12:43 AM  
Anonymous John said...

As President John F. Kennedy once said, "Life's not fair." No one raised a voice against that statement. But I would add that the purpose of civilization, society, and government is to make life as fair as reasonably possible for everyone. This is what the SSA is for.

My point in my previous post was that, in the end, it's all a game played with winks and nods, left hands pretending to not know what the right hands are doing, and switching money from pocket to pocket to pocket (which happens a lot when we give women pockets). (JUST KIDDING!!!!)

Seriously, SSA is a lifesaver for the poor, a help for the middle class, and the wealthy will have too much income to qualify for much if any social security. If the middle class "wisely" invests some of their income as savings they should be able to exist well above subsistence levels when they retire.

But a couple of specific points:
- what you "pay into" SSA is a percentage of your income. So, you contribution does reflect your income level, but there is an upper limit on what you can receive.
- the government of the United States is not private industry. Don't compare those pension plans with SSA.
- your savings and investments are and will be a finite resource when you retire. Factoring in inflation, it could easily be depleted. Your social security won't be depleted, despite your beliefs.

Respectfully,
- John

5/09/2006 8:10 AM  
Blogger Jody said...

your savings and investments are and will be a finite resource when you retire. Factoring in inflation, it could easily be depleted. Your social security won't be depleted, despite your beliefs

Ever hear of annuities? Reverse mortgages? Payments in perpetuity. (You can also tie them to inflation if you so choose). In fact, I thought it was common investment advice to save up a large lump sum and then convert a sizeable fraction over to an annuity upon retirement.

5/09/2006 2:38 PM  
Anonymous John said...

Well, there seems to be gotchas with annuities and reverse mortgages. At

http://www.reversemortgage.org/

I find that you can't get more than your home is worth, and in fact, it looks like there are fees to pay, just like a real mortgage. It sounds like the best thing about a reverse mortgage is that you won't lose your house once you deplete your equity. And, the government will take care of you if your reverse mortgagor goes belly up(they're nice).
And annuities, while sometimes a life long deal, return a lot less per month than your interest off the same amount.

But, to resolve this issue, I think a lot of math would need to be done - or perhaps a computer program that would compare various scenarios of possible futures. You would input your age, what you currently earn, what your current status is with SSA (they have to mail that to you once a year - they're nice), current net worth, anticipated annual salary increases, savings, home equity at retirement, etc.. Then it would show results for retiring at various ages with a various ranges of those input values.

Again, respectfully,

- John

5/09/2006 6:44 PM  
Blogger SpakKadi said...

Okay, it is based on the taxable income. It just took me while to find it.

Anyway, after 2041, Social Security will only be able to pay 75% of its obligations. You seem to think that's fine since 75% is better than zero. But to me, that's still a rip off (imagine if you bought life insurace, but the company only paid your survivors 75% of what they promised)(since I'm retiring after 2041, can I just pay 75% of my FICA tax? Thanks). If we want to guarantee that people will have something to retire on, then set aside that money in investment accounts that have something akin to FDIC insurance where the government will only have to pay out money if something goes horribly wrong. Otherwise, the money you put in, the gains on the investment, and the money you take out are all yours.

Other countries, including several European countries and Japan, are already running into problems supporting their social programs. Some countries, like Italy, even have negative population growth. We are not quite as socialist as these countries are and our birth rate is not declining at quite the rate it is in some other countries, but that doesn't mean there won't be a problem. It just means we're getting there slower - which could be good, since we have more time to address it, or bad, since we also have more time to ignore it.

Other reasons we seem to disagree about Social Security appear to lie in differing assumptions about the role government should play in people's lives. That's just a whole 'nother discussion. Which, depending on how wired I am, I may start with another post.

5/09/2006 8:41 PM  

Post a Comment

Links to this post:

Create a Link

<< Home