Social Security is in the news again. No, not that the politicians have agreed on a fix for it, or even agreed that there is a problem. Rather it is the projection that the Social Security Administration, some time this year, will begin paying out more than it takes in. You know, it will start going broke.
The politicians view the social security problem as a political weapon. The Democrats use it to scare the bejeezus out of the elderly and thus rally them to vote Democrat knowing full well that if they ever fixed it there won’t be a campaign issue for future years. The Republicans had twelve years within which to fix it but because of a handful of cowards failed to begin the privatization that can actually save the program. Apparently all are content to simply raise taxes in order to keep a failed system afloat.
I’ll be turning sixty-four in a couple of months. About this time every year I get an official Social Security Statement which lists the amounts of my contributions over the approximately forty-nine years that I have worked and contributed to Social Security. It also provides a projection of benefits based upon assumptions that I will begin receiving benefits when I am full retirement age (66) as well as a method of calculating benefits on the assumption that I will elect to receive benefits earlier. (Although I have been eligible to receive benefits since age 62 the earned income offset reduces benefits to zero.)
So it is about this time every year I get out my spreadsheet computer program and calculate how poorly my government has been treating me.
It isn’t hard to do and the information necessary is readily available. First, I pulled out my most recent Social Security Statement that the Social Security Administration supplied me. Included in that is your entire earnings history — well, at least the earnings subject to Social Security taxes. Unfortunately it doesn’t have either the Social Security tax rate or the amount you paid in Social Security taxes for each of those years.
But the internet is a wonderful tool and in about five minutes I found a chart showing the changes in the rates for the Social Security taxes and another chart showing the amount of earnings subject to the taxes (http://aspe.hhs.gov/search/2000gb/sec1.txt ). From this information I used both the employer and employee contributions because that is what the Social Security Administration shows on your statement in calculating your benefits. For me, the employer and employee contributions over my 49 year working life were approximately $199,011.
Using these pieces of information I built a spreadsheet that calculated the Social Security taxes paid each year (earnings subject to tax times tax rate for the applicable year). Then I calculated the amount I would have earned on those taxes if I had invested them instead of paying them into the Social Security System. I used two different rates of return in doing the calculations. First I used five percent which is a reasonably conservative investment in a combination of Treasury bills and top rated bonds. Then, as a proxy for investment in the stock market, I used the growth in the Standard & Poor’s Index from the year in which the tax was paid until the close of 2007 as a proxy for investment in the stock market.
The reason I used those factors is that Treasury bills represent the safest investment available and when combined with high grade bonds produce a slightly better yield — it is the type of investment recommended by financial advisers for those who have a low risk tolerance. I used the S&P 500 Index because it represents investment across a broad range of stocks which does not subject an investor to the risk of picking individual stocks. (By the way, these calculations include the effects of the market downturn post 9-11.) So, how did they do?
Well, using the conservative five percent assumption, my investment would have grown from $199,011 to approximately $452,558 at the end of 2007. Had I invested that money in an S&P 500 mutual fund, the amount would have grown to $883,794. Not bad for a $199,011 investment spread over 45 years. But the real comparison is the monthly benefit that I could expect under the various options:
ï‚· Actual Social Security Payment per Statement $1846/mo
ï‚· Based upon 5% (T-bills and bonds) $2904/mo
ï‚· Based upon S&P 500 performance $7,251/mo
(I used annuity tables to determine by life expectancy — twenty-one years at age 64 and an amortized payment using the same rates I used for calculating growth of each alternative.)
So what’s the point. Well the points are threefold:
ï‚· First, under any scenario, I would have been better off investing my Social Security withholding and employer matching funds in anything other than the Social Security System.
ï‚· Second, these are the results beginning when the Social Security withholding for me was about $100 per year — think about what it will look like for our children for whom the withholding and matching are closer to $10,000 per year.
ï‚· And third, for the professional alarmists who claim to represent the elderly, BUTT OUT. Nobody has yet suggested a solution that would impact anyone over the current age of fifty-five. In other words, this isn’t an issue for the elderly, but rather for the working generations. I asked my children, ages 27 and 30, and they said they would rather invest than rely on the government.
But as we have learned, the social security system is about politics, about manipulation of voting blocs, and about lying to the elderly. It certainly is not about mathematics, investment acumen or actual concern about current or future beneficiaries.