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I know someone who loudly complains that, I, as a retiree who paid the
maximum amount required into Social Security for the entire 50 years of my working life, am not
entitled to receive all the benefits that I am now collecting as a post-70-year-old retiree. He
rails against the fact that I may end up collecting more than I contributed. This baby-boomer
ignores the many who contribute to Social Security and die before they collect what they have
contributed. He ignores the fact that those of us who paid into Social Security did exactly what
the government required. Is it our fault or the government’s that the government decided to pay
out more than they were taking in? Is it our fault or the government’s that the government has
done a lousy job of investing my contributions? Did the government give me the choice of contributing
to Social Security or contributing to a personal retirement account such as an IRA or 401k? - My
personal retirement investments have paid off 10-fold what my contributions to Social Security
have! Is it our fault or the government’s that the government hasn’t required increased contributions
into Social Security to keep pace with what they have been paying out? Is it our fault or the
government’s that Social Security has been lending our contributions to the government instead of
putting them into much higher return investment as most prudent people do? My friend is ignorant
of the facts associated with Social Security as may be many others. He hasn’t checked his facts
and he hasn’t done the math. Instead, he spouts the liberal dogma about the 1% who haven’t paid
their fair share and that our seniors are receiving “benefits” to which we are not entitled.
When this person complains that I didn’t pay enough into Social Security, I remind
him that I didn’t determine how much to pay into my Social Security Trust Fund – our great
government did! Why is it that non-governmental insurance companies can develop actuarial
tables that determine the payments into and the payouts out of life insurance policies so that the
total of the payments in covers the sum of the payments out and the insurance companies are
still able to make a profit on top of all that? If private insurance companies can figure out
insurance policies, why can’t our great government figure out how much we should
pay into Social Security to cover what has to be paid out?
Have you noticed that Social Security is now called the 'FEDERAL
BENEFIT PAYMENT’? In reality, Social Security is not a benefit – it’s a repayment
of the forced contributions by working Americans into the Social Security Trust Fund.
Not only did we all contribute to Social Security but our employers did too. It totaled 12.4% of
our income before taxes.
In my case, I began my work career at the age of 16, with part time
employment and continued working till I retired at the age of 66 - some 50 years. Over the span
of these 50 years, my average annual salary was on the order of $30,000. What many people who
claim that we seniors haven’t paid enough into Social Security to pay for what we get out don’t
take into account is the money that Social Security earns or should earn on the funds it is
supposed to put into trust for us. It’s true that if I worked for 50 years at an average annual
salary of $30,000, I and my employers would have contributed $186,000 into the trust fund. If I
were to then collect $30,000 in annual Social Security benefits for 20 years after retiring, I
would be receiving $600,000 – a net loss of $414,000 for Social Security. But, what
these critics fail to take into account are the effects of investment and compounding.
Remember that the government collects Social Security revenue over a long stretch of time, as
much as 50 years in my case. This money should be earning compound interest over this span of
time. And even as it is paying back the money we have contributed, it still should be earning
interest on the money remaining in the trust fund. The amount of money earned is considerably
more than the money contributed. Consequently, Social Security has, or should have, a significant
net surplus based upon the money contributed and retained.
If you averaged $30,000 of income per year over a working life of 50
years, you would have contributed 6.2% of your income and your employer would have matched this
with another 6.2%. Together, you both would have contributed 12.4% of gross income, or
$186,000. if you had been allowed to put this contribution into any reasonable retirement
plan with a nominal 5% rate of return, your investment would be worth $817,713 after 50 years,
and with a 20 year payout of $30,000 per year, Social Security would have made a net profit of
$217,713.
Is a 5% rate of return reasonable? Let’s see.
The historical rates of return on investments and savings are as follows:
1928-2011:
Stocks – 11.2%; Treasury-Bonds – 5.4%;
Mix of 50% Stocks and 50% Treasury-Bonds - 8.3%
1962-2011:
Stocks – 10.6%; Treasury-Bonds – 7.2%;
Mix of 50% Stocks and 50% Treasury-Bonds - 8.9%
2002-2011:
Stocks – 04.9%; Treasury-Bonds – 6.9%;
Mix of 50% Stocks and 50% Treasury-Bonds - 5.9%
So, a 5% return on investment is historically actually quite low.
If you had invested you money over the past 50 year conservatively, with a 50-50 split
between stocks and treasury-bonds, you have been earning around 9%.
Anyway, let’s continue to be very conservative. If the government had
invested your Social Security contributions at the 5% rate of return, they would have ended up
with $817,713 after 50 years. If you were to then collect $30,000 in annual Social Security
payouts for 20 years after retiring, you would have received $600,000 – It would take
around 27 years for you to recoup what you paid into Social Security. But that assumes that your
$817,713 would not be collecting interest over the rest of your life – certainly not the actual
case. The actual net profit for Social Security would be even greater. Let’s see just
how much greater.
If we assume an Annual Cost of Living Adjustment, COLA, of 4% (COLA has
historically averaged less than 4%), and a continuing rate of return of 5% on the money Social
Security is supposed to be retaining in its trust fund, at the end of 20 years of payout, Social
Security would have a net profit of $743,139.
Remember, that after 50 years of paying into Social Security and
earning interest at 5% per annum, the Social Security Trust Fund should have accumulated $817,713.
The annual interest on that $817,713 is $40,886, some $10,886 more than your first year’s retirement
repayment of $30,000. Even when giving you retirement repayments, Social Security should still be
earning more money than it is paying out until your 11th year of retirement. After that the Social
Security payouts exceed the interest earned, but after 20 years of payouts, the amount in your account
would still have been $743,139.
How much better most average-income people could live in retirement
if our government had just invested our money in low-risk interest-earning accounts. Instead, the
folks in Washington pulled off a bigger Ponzi scheme than Bernie Madoff ever did. They took our money
and used it elsewhere. They “forgot” that it was OUR money they were taking. They didn’t give us the
opportunity to ask us if we wanted to lend the money to them.
Now, they have the chutzpah to refer tour Social security payments as a
“benefit,” as if we never worked to earn every penny of it. For those of us who have paid into
Social Security, we are simply receiving a repayment. This repayment is considerably less than we
would have received if we had been allowed to invest the money ourselves. For retirees like me, it
is not a “benefit” – it is Our Earned Retirement Income.
On the other hand, there are Social Security recipients who do indeed
receive “benefits.” These are the ones who are collecting benefits without either having contributed
into the system or who are collecting benefits before they have paid in the full amount that they
should be contributing. Some of these recipients are entitled to do this. Some are not. In some
cases, it is highly questionable if the recipients should be receiving these "benefits” or
entitlements. I, and others like me, have contributed the full amount of whatever the government
required toward our retirements while many government entitlement recipients have contributed
little or nothing toward what they are now receiving.
Social Security's high taxes have prevented too many families from
accumulating savings. Just as bad, the return that most workers have gotten on the money they
have paid into Social Security has been abysmal. Our government has not invested our funds wisely
and is not managing the program in a financially responsible fashion. Will those of us who have
paid our fair share into Social Security receive our investments back? Maybe.
“For the past several years, Social Security's Trustees have been reporting
on the accelerating depletion of that program's Trust Fund. As recently as 2008, the Trust Fund's
doomsday was projected to be as far away as 2041. But over the past several years that collapse date
has inched forward and now sits at 2033.
“Unfortunately, even that projection looks like it's a bit too optimistic.
It turns out that there's a very real risk that next year's report will move that date even closer.
“What Happened?
‘Since the Trustee's Report was written in April, some news has emerged about
the investments in the Trust Fund putting a drag on the returns.
“Every year, Social Security rolls over its maturing long-term Treasury bond
holdings, picking up new ones to replace the ones that are expiring. Because of exceptionally low
interest rates, Social Security is earning less interest on its new bonds than it did on its old ones.
“That lower interest, along with the fact that the program now takes in less
in taxes than it spends in benefits, means the Trust Fund is on even shakier footing.
- - -
“Every year since 2010, the new long-term bonds being bought by Social
Security pay substantially less interest than the old long-term bonds that are maturing. That red
line is getting deeper, and the 2012 total is nearly $5.4 billion in annual interest foregone
because the new bonds pay that much less than the old ones.
- - -
“Since 2010, the total annual income foregone due to lower interest rates
has exceeded $10.5 billion. Since this only counts the long-term bonds that Social Security is
using -- not the short-term certificates that get traded much more frequently -- those numbers
add up to create a whole world of pain.
“It's a huge deal, because Social Security is already paying out more in
benefits than it takes in as taxes. The only reason the Trust Fund is still growing at all is because
of the interest it generates on the Treasury bonds it holds.”
(Ref. 1)
So us old-timers get a lousy rate of return on our contributions into
Social Security, we won’t recoup what we paid in (plus the interest that should have been earned),
but there is even talk of the system going belly-up – not a likely event considering the politics
involved. In any event, let’s not hear any more stupid comments about old-time pensioners
receiving “benefits’ rather than a repayment of what we’ve contributed and
let’s not hear that we’re receiving more than we’re entitled to. In truth, we’re receiving only
a fraction of what we should have been allowed to earn.
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References:
- Social Security Running Out of Money – 2012, Chuck Saletta, The Motley Fool,
29 September 2012.
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