Social Security. To even mention the words in other than the most laudatory tones is to invite the wrath of Democrats and old people. ‘Puter, of course, cares not what Democrats or old people think of him. ‘Puter cares only for the truth.
So what’s the truth about Social Security? Which truth? There are a whole bunch of inconvenient truths as one wag once said. Here are but a few.
Truth 1: Social Security is a Ponzi scheme.
Ponzi schemes are where an “investment manager” takes “investors’” money, promising them great riches and wealth because he’s found the perfect, foolproof investment. The “manager” collects the funds, spends them, and pays out “investors” with funds taken in from future investors. The scheme can work for a time, even a long while, but eventually the scheme crashes. And when the inevitable crash comes, the only people who get their money back are the first investors who request their money back, if even them.
Social Security’s been this type of con from the start but one that was cleverly structured to work for a time. There are a few reasons it’s worked this long.
Unlike the usual Ponzi scheme, participation is mandatory. Con men have to go find marks and convince them to participate. Government simply forces all employers and all workers to participate. Much easier to find marks when you can require everyone be a mark.
Initially there were far more workers paying into Social Security’s so-called trust fund than were elibile to receive benefits. It’s tough to go bankrupt when way more money’s coming in than going out, so Social Security self-funded for a time. In fact, it threw off scads of excess money. More on that later.
Also, the eligibility age for Social Security was set such that more than half of Americans died before reaching the eligibility age. So long as there were way more people paying in than taking out, Social Security’ Ponzi scheme rolled on.
The hook New Deal Democrats used (and it was a brilliant hook) to sell Social Security to the public (aside from it being the Great Depression when everything sucked and pretty much everyone was broke) was everyone pays in now and everyone gets out way more than they ever paid later.
Truth 2: Social Security is flat broke.
The dirty little secret is Social Security’s pretty much always been bankrupt. But now Social Security’s officially broke. Costs will exceed income in 2020 and the so-called trust fund will be depleted by 2035. This is going to take some ‘splaining.
This is how Social Security works. You and your employer each pay 6.2% of your income in Old Age, Survivor, and Disability Insurance (OASDI) tax, docked straight out of your paycheck. Hence, OASDI’s often referred to as a payroll tax. When all your sweet, sweet Benjamins roll in the door, the Social Security Administration (SSA) spends every last penny in one of two ways. It’s either spent on benefits and administrative costs or, if there are any excess funds, those funds are by law invested “in special Treasury bonds that are guaranteed by the U.S. Government. A market rate of interest is paid to the trust funds on the bonds they hold, and when those bonds reach maturity or are needed to pay benefits, the Treasury redeems them.” Got that?*
“But ‘Puter! There are, like, totes US Treasury bonds in the trust fund! Social Security’s, like, completely not broke at all! MUH LOCK BOX!!1!,” Al Gore shouts from high above the Atlantic on his private jet returning from Davos to his energy-guzzling 10,000 square foot eight bedroom mansion outside Nashville.
Calm your tits, people. ‘Puter’s going to explain.
What are bonds? They’re government issued IOUs. And how does the government repay bonds when they’re redeemed or mature? Well, the government uses tax money to repay them. And where’s that tax money come from? It comes from non-OASDI taxes. Basically, it comes from your income taxes.
When the SSA has to dip into its so-called trust fund, chock full of IOUs, it’s broke. It’s admitting that there’s more going out than coming in. It’s running at a loss. As we see above, we’ve arrived at this point in 2020. But what about the Treasury bonds in the trust account? Those bonds aren’t assets, they’re liabilities. They’re IOUs. The IOUs are being paid to the holder (the federal government) by … the federal government. It’s literally a zero sum (or perhaps negative sum, depending on interest costs, etc.) transaction. There’s no there there.
Think of it this way. You’re the federal government. You deposit a $1,000 check you wrote yourself to your checking account. The check is drawn from the same account into which you’re depositing said check. This account started with $0. You know insist to the bank that you now have $1,000 in your account. You have the same $0 you started with, no matter how big the check your write is.
Or maybe this way works better for you. Under counterintuitive government accounting, the SSA treats the Treasury bonds (IOUs, remember?) as assets even though it’s the government repaying itself for misusing your tax payments the first time by taxing you a second time to repay the funds you already paid the first time. Understand? Probably not. Go back and read the unintelligible sentence until you grok what ‘Puter’s laying down then come back. ‘Puter’ll wait.
You’ve paid into Social Security for years, maybe decades. That money’s gone, used to either pay benefits or buy Treasury bonds (which in this instance are functionally worthless to the taxpayer). Any dollar you pay in OASDI today is going to pay Boomers’ benefits and it’s still not enough to meet the total payout.
Even if you don’t buy ‘Puter’s totally awesome “the bonds are worthless” argument, the SSA admits it will rapidly cash in its trust fund bonds/IOUs government wrote to itself (which as ‘Puter just showed you are worthless in the first instance) to make up the difference. In the most favorable light to government,
Social Security’s somewhere between the “people getting wise to the con” stage and the “total collapse and bankruptcy” stage of this Ponzi scheme.
Truth 3: Social Security isn’t a national pension.
Social Security was never intended to function as a pension.** It was intended to be an insurance policy. It was intended to insure that elderly people who were unable to do any work wouldn’t be homeless and starve in the streets.
In the most favorable light, Social Security’s akin to term life insurance. You pay a low amount for a large benefit if you die during the policy’s term. The insurer’s banking that the rates it’s charging you and everyone else, invested at a decent rate of return, will be sufficient to pay out the claims as made. Insurers also figure that most people they’re insuring aren’t going to die during the policy term. This is why they can charge you a relatively small rate for a large benefit. It’s also why life insurance gets prohibitively expensive as one ages. Everyone dies, and you’re likelier to die in a given period the older you get so you’re going to pay way more for coverage as the insured against risk (you croaking) has a high probability of occurring.
Social Security’s like this superficially, but Congress hasn’t permitted the SSA to charge policy holders (taxpayers) sufficient rates to cover the risk (lifetime payouts). Nor is SSA permitted to raise the eligibility age (risk rate) to ensure there are sufficient funds to meet reasonably assumed obligations. Last, unlike insurers, the SSA’s required to invest in the lowest returning investment instruments known to man. US Treasury bonds pay ultra-low interest rates, generally below the inflation rate meaning over time the SSA’s “investment” is losing money. Insurers invest in a low-risk portfolio, but one that will exceed the rate of inflation by at least a few percentage points so their portfolios generally gain.***
The biggest reason Social Security isn’t a pension plan is because Congress is free to change the terms and conditions of the program any time it wants. If Congress can crater a program you’ve paid into for years in good faith, it’s not a pension. Congress can even cancel Social Security entirely if it so chooses. Here’s the language ‘Puter lifted from his Social Security statement.****
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 2035, the payroll taxes collected will be enough to pay only about 80 percent of scheduled benefits.*****
If you thought the money you paid over the years and decades was invested in a kind of public 401k, you’re like most Americans: morons who didn’t read the terms and conditions of the program you signed on for. Admittedly, the government’s going to ding your paycheck (and your employer) for 6.2% of your salary every paycheck whether you consent to it or not. But you’re still an idiot if you believed Social Security was a pension.
Truth 4: Social Security is a bad deal for you and for everyone else.
‘Puter ran some numbers. For ease of calculation (if Gracie were here, he would’ve used more complicated ones because she’s like some sort of Excel idiot savant), ‘Puter used the SSA’s benefit estimator.
‘Puter entered $50,000 for a hypothetical worker’s current year income, a birth date of January 1, 1970, and a retirement date of June 1, 2067 (67 years, 6 months of age). The SSA made income assumptions based on this information (lower early year earnings but $50,000 per year from now until retirement) and calculated a monthly benefit of $3,235 per month (in future dollars).
Even if we assume this worker made $50,000 for the entirety of her career (which the SSA did not assume), the total employer and employee contribution would be $279,000. ‘Puter’s best guess is that total contributions would be closer to $150,000 (probably even less) based on the SSA’s assumptions.
Assuming the higher OASDI tax paid amount, this worker would receive more benefits than amounts paid in a little over 7 years. The worker would be 74 years old and would have taken out every single penny she paid in, then transforming into a welfare recipient living off that sweet, sweet sucker taxpayer dime.
Assuming the lower OASDI tax paid amount, this worker would receive more benefits than lifetime OASDI tax paid in just shy of 4 years. The worker would be just 71 years old and already on the dole.
The current average life expectancy for an American male alive at 67 years old is about 83. A woman of the same age can expect on average to live until about 86. That’s about 9 and 12 years respectively of this worker living off the dole.
Or, using the assumptions on benefits, the male would get $349,380 in unearned benefits. The female would get $465,840 in benefits she didn’t pay for. This is 1.66x more than the woman ever paid in and 1.25x in the case of a man.
‘Puter assumes most of you would argue that while it’s a completely crap deal for the taxpayers, it’s actually a really good deal for the recipients. And you’d be right. Except it ain’t that easy.
If you invested that money yourself over the course of your career, you’d do much, much better.
If you assumed level annual investments of $6,200 (the $50,000 annual wage multiplied by the 12.4% OASDI tax over a 45-year period (the assumed career time) at a 6% rate (which is conservative), the person would’ve had roughly $1,400,000. Even without calculating any future compounding after retirement, it would take the assumed worker of either sex 36 years to burn through the money.
You’d have to live to be 103 to exhaust the fund and nearly all Americans ain’t getting there.
Even assuming average OASDI taxes of, let’s say, $4,000 annually (a $33,300 annual salary), you still end up with about $900,000. It’d take you 23 years to exhaust the funds which exceeds the life expectancies for a male or female 67-year-old.
Assuming an even lower OASDI tax payment of $3,000 annually (a $25,000 annual salary), you still end up with about $675,000. If you assumed you’d only live another 20 years after retirement at 67, you’d still have $2,800 per month which would equate to an annual salary of $33,600 which is more than you ever made in a year during your career.
And if you went crazy and invested in an S&P 500 index fund and assumed the average annualized total return for the index over the last 90 years of 9.8%, you’d have a lot more money than that. How much?
Under the $3,000 assumption, you’d have about $2,225,000. Under the $4,000 assumption, you’d have about $2,965,000. Under the $6,200 assumption, you’d have about $4,500,000. The power of compounding and investing smaller amounts over time for the long haul is for real, bitches.
So yeah. ‘Puter stands fully behind his assertion that both you and the taxpayers are getting royally screwed by Social Security.
Final Truth: It’s not the SSA’s fault you’re getting screwed.
It’s Congress’ fault completely and totally. Congress created this program.
If you’re angry after reading this, call your representatives and senators and light them up for creating a Ponzi scheme that’s bankrupting the nation and ultimately returns far less to you than if they’d simply mandated you invest the funds yourself.
* For purposes of this post, ‘Puter doesn’t address the dipshittery of investing funds in low-yield government instruments when you’re selling Social Security to Americans as a pension fund. That is, making one or two percent on 10 year bonds ain’t gonna get closing to meeting the needs of millions of people when considering inflation. The SSA really should’ve at least moved a portion of the portfolio into the market.
** ‘Puter’s using pension here even though it would be more accurate to use “retirement plan” since a pension’s technically not your money. It’s a contractual promise by an employer to pay you defined benefits on retirement. Employers are free to breach this contractual promise and many do so, especially through Chapter 11 bankruptcy restructures.
*** Don’t even get ‘Puter started on how quantitative easing and the Federal Reserve Bank holding interest rates extremely and arguably artificially low for more than a decade now have f*cked investors of all types looking for low risk investments with yields in excess of inflation.
**** If you haven’t looked at your Social Security eligibility and benefits, you really ought to go to their website, create an account, and take a gander. The site is quite well done and intuitive. Kudos to the SSA at least on this issue.
***** ‘Puter reaches full eligibility age (67 for ‘Puter) in 2036. So he’s got that going for him.