{"id":31646,"date":"2012-08-19T14:04:37","date_gmt":"2012-08-19T18:04:37","guid":{"rendered":"http:\/\/valorguardians.com\/blog\/?p=31646"},"modified":"2015-02-07T13:05:27","modified_gmt":"2015-02-07T18:05:27","slug":"ever-wondered-just-how-bad-youre-getting-screwed-by-social-security","status":"publish","type":"post","link":"https:\/\/www.azuse.cloud\/?p=31646","title":{"rendered":"Ever Wondered Just How Bad You’re Getting Screwed by Social Security?"},"content":{"rendered":"

As I\u2019ve previously noted, most folks approaching retirement age probably have already figured out that they\u2019re gonna get screwed by Social Security<\/a> \u2013 e.g., that they will get less value back in benefits than they paid in in taxes.\u00a0 But that\u2019s only part of the issue.<\/p>\n

You\u2019re also not going to own a damn thing.\u00a0 Your benefits are completely dependent on the whims of Congress; there is no contractual relationship between you and Social Security.\u00a0 If Congress decides to cut your benefits in half because of future financial difficulties, well, sorry.\u00a0 That\u2019s life, and you’ll have absolutely no legal recourse other than to vote for a different Congressman.\u00a0 And that\u00a0 may not make any difference.<\/p>\n

However, spreadsheets and the Internet are wonderful things.\u00a0 I\u2019ve developed a calculator that lets you see precisely what Social Security has cost you compared to a private retirement plan; you can download it here<\/a> if you like.\u00a0 So now you can see \u2013 if you\u2019re so inclined \u2013 just how badly you\u2019re getting screwed by Social Security.<\/p>\n

This calculator allows you to input your income history.\u00a0 It then assumes that the employee and employer contributions for OASDI\u00a0 – the Old Age Survivors and Disability \u201cInsurance\u201d part of Social Security taxes – \u00a0are each then invested in an actual retirement account owned by the recipient, with returns based on the DJIA.\u00a0 (And no, insipid<\/em> – the fact that the Social Security Administration and other elements of the Federal government continue to lie through their teeth and call it \u201cinsurance\u201d doesn\u2019t alter reality.\u00a0 Social Security is not and never has been insurance.\u00a0 There’s no contract, no policy, no premiums.\u00a0 Those OASDI deductions from your paycheck\u00a0 are taxes, not premiums; Social Security is a PAYGO income-transfer program and is not any form of retirement savings program or insurance policy.)<\/p>\n

The Alternative We Didn’t Adopt<\/strong><\/p>\n

Now, let\u2019s assume Social Security had been converted in, say, 1965, into something like a \u201cSuper-Hybrid IRA with employer matching\u201d, but with the earliest age one could begin making withdrawals set at age 62.\u00a0 Under this scenario, there would be the obvious benefit for our children and grandchildren of not saddling them with a huge economic \u201cSword of Damocles\u201d hanging over them regarding actually paying \u00a0future Social Security recipients\u2019 benefits from current tax receipts.\u00a0 (Remember:\u00a0 today\u2019s Social Security is PAYGO.\u00a0 And the only collateral backing the system are Federal government IOUs from one government agency to another.)<\/p>\n

The investment vehicle for these contributions is a hypothetical \u201cDJIA Mutual Fund\u201d that precisely tracks the DJIA \u2013 e.g., the fund consists of the stocks in the DJIA at proportions owned such that one share in the hypothetical fund costs exactly the DJIA.\u00a0 Investments are presumed to occur on the last business day of the month, without load, and to consist of 1\/12 of annual earnings.\u00a0 (In actuality, they\u2019d probably occur a couple of days later and consist of the previous months\u2019 contributions, but I approximated due to data availability for DJIA aligned on end-of-month and the fact that I didn\u2019t want to deal with different amounts of earnings each month based on slightly more\/fewer days in a given month.)\u00a0 At age 62, the owner would be allowed access to these funds, like any other retirement fund.\u00a0\u00a0 He\/she would in fact own them – lock, stock, and barrel.\u00a0 If he\/she died early, his spouse\/heirs would inherit them.<\/p>\n

Since at least the employee contributions would be post-tax earnings going into the investment account, under Roth rules at least half of the withdrawals made from such a fund would be tax-free.\u00a0 If employers were allowed to deduct the cost of such contributions as a mandatory employee benefit expense, the other half would be taxable.\u00a0 That\u2019s arguably still better than today\u2019s Social Security, where up to 85% of Social Security benefits are subject to federal income taxes.<\/p>\n

The Model<\/strong><\/p>\n

The spreadsheet model consists of 4 pages.\u00a0 The first page allows you to input annual wage data for any year between 1960 and 2029. \u00a0\u00a0It also contains other historical data of interest \u2013 minimum wage info for each year, the Social Security wage base, and the OASDI tax rates in effect for both employers and employees, and a hypothetical \u201cmidpoint\u201d earnings case (e.g., an individual earning exactly halfway between minimum wage and the Social Security wage base each year).\u00a0 \u00a0The second page contains end-of-month DJIA data for all years from 1960 to July 2012 – there are multiple sources of such freely available on the Internet – and uses a placeholder value for future months.\u00a0 (This placeholder value will obviously need to be updated each month in the future to reflect actual end-of-month DJIA figures.)\u00a0 The third page gives calculations for each month in terms of amount invested, DJIA \u201cshares\u201d purchased, and an individual\u2019s net account holdings and value based on the DJIA at that point in time.\u00a0 A fourth page calculates retirement payments from this account based on a rate of return, an assumed monthly payment, and starting balance.\u00a0 The payments are increased by the rate of return each year to at least partially account for inflation, and are (like federal retirement payments) truncated to the nearest dollar. Format is MicroSoft Excel 2003, so you\u2019ll need software that can use this format in order to use the spreadsheet.<\/p>\n

To use the spreadsheet, enter your career earnings on the first page.\u00a0 You can also include future estimated earnings if you like, but since you don\u2019t know what the DJIA will be you\u2019ll be \u201cflying blind\u201d there regarding future holdings and values.\u00a0 (The placeholder I used for future DJIA is 1, so any info after July 2012 is grossly inaccurate \u2013 but that also does clearly show you when you\u2019re projecting into the future on the Balances page.)\u00a0 Then assume an investment rate and monthly payment and enter it, along with the account worth, into the appropriate blocks on the Retirement Payments page.\u00a0 Like Social Security, the retirement payments calculator assumes a 1-month lag (beginning of next month vice month of retirement) for beginning of payments.\u00a0 This calculator also implicitly assumes you\u2019ve \u201ccashed out\u201d into a fixed-value, income-producing\u00a0 investment like Treasuries or Municipal Bonds and will be drawing from that source.\u00a0 The month in which the EOM balance goes negative is when you run out of money.<\/p>\n

Effects<\/strong><\/p>\n

So, how would this stack up with today\u2019s Social Security?\u00a0 What would be the effect on individual recipients?<\/p>\n

AARP has a Social Security Benefits Calculator<\/a>.\u00a0 (The SSA does too, but unlike previous versions their current calculator\/estimator doesn\u2019t seem to allow entry of hypothetical incomes \u2013 it now seems strictly tied to one\u2019s individual earnings record at SSA.\u00a0 So while it\u2019s more accurate in estimating your personal Social Security benefits, it\u2019s rather worthless for general estimation and comparisons.)\u00a0 Using that AARP calculator, I ran three scenarios:<\/p>\n

    \n
  1. A career full-time minimum-wage worker;<\/li>\n
  2. A career \u201cmidpoint\u201d worker (e.g., halfway between minimum wage and the Social Security wage base)<\/li>\n
  3. Someone earning the full Social Security wage base throughout their career.<\/li>\n<\/ol>\n

    Two big caveats here:\u00a0 first, the AARP calculator asks for an \u201caverage salary\u2019.\u00a0 I\u2019m assuming that the AARP calculator is asking for that average salary in current-year dollars and converts this to equivalent salaries for prior years properly.\u00a0 Otherwise, AARPs estimates could be high.\u00a0 Second, I\u2019m also assuming that it recognizes minimum wage as exactly that \u2013 minimum wage.\u00a0 Otherwise, since minimum wage has risen dramatically over the last six\u00a0 years the estimates calculated by the AARP calculator will be substantially higher than actual for the minimum wage case.<\/p>\n

    I assumed this hypothetical individual was born on 1 Jan 1951, started employment in Jan 1968, and will retire at age 62.\u00a0 Here\u2019s what AARP\u2019s calculator gave for benefits under those scenarios.<\/p>\n

      \n
    1. Career Min Wage Worker, Age 62:\u00a0 $656\/mo<\/li>\n
    2. Career Midpoint Worker, Age 62:\u00a0 $1548\/mo<\/li>\n
    3. Career Wage-Base Earner, Age 62:\u00a0 $1953\/mo<\/li>\n<\/ol>\n

      So, how would those folks fare under a privatized scenario as described above?\u00a0 Well, let\u2019s \u201crun the numbers\u201d and see.\u00a0 And since not too many people are career minimum-wage earners or stay exactly at one relative earnings point for their whole career, let\u2019s look at how a more typical career pattern would look too.\u00a0 Specifically, we\u2019ll look at someone who (1) works for a few years at minimum wage, then (2) gets into a professional career field, starting at the entry-level, then (3) gets periodic promotions, and who (4) ends up earning around $90k a year for their last 3 years (ages 60\/61\/62).\u00a0 (Income totals corresponding to this hypothetical scenario starting in 1968 and ending in 2012 are loaded into the version of the spreadsheet available for download.)\u00a0 All are assumed to retire at age 62; the net worth shown below for each are as of July 2012.<\/p>\n

      Net Worth, Privatized Retirement Scenario<\/p>\n

        \n
      1. Career Min Wage Worker:\u00a0 $204, 646<\/li>\n
      2. Career Midpoint Worker:\u00a0 $606,585<\/li>\n
      3. Career Wage-Base Earner:\u00a0 $1,008,524<\/li>\n
      4. Typical Professional Career:\u00a0 $555,011<\/li>\n<\/ol>\n

        No, that first value is not<\/span> a misprint.\u00a0 Under the privatized option I presented above, a career minimum wage earner would have had a retirement account worth nearly $205,000 as of 31 July 2012<\/em>. While he or she might be somewhat better off under Social Security, given life expectancies that\u2019s also not a slam-dunk; if Social Security ends up paying less in a few years, he\/she would be better off under the privatized scenario.\u00a0 And in any case:\u00a0 at 2.5% return, the guy\/gal could draw benefits, starting at $656\/mo and upped by 2.5% annually, for between 27 and 28 years \u2013 or until he\/she were close to 90 years old.<\/p>\n

        A career midpoint worker would end up with the ability to draw benefits from his\/her account starting at the same monthly amount provided by Social Security for roughly 34.5 years under those same conditions \u2013 or until roughly age 96 1\/2.<\/p>\n

        Wage base earners?\u00a0 44+ years of benefits starting at the same dollar figure provided by Social Security \u2013 or until age 106.<\/p>\n

        Oh, and that \u201ctypical professional career\u201d?\u00a0 31 1\/2 \u00a0years of benefits at approx $1450 per month, increased by 2.5% each year.\u00a0 Or until age 93 1\/2.<\/p>\n

        Further: under this scenario, you could opt to take smaller monthly payments to extend the period if you were seriously worried about outliving your money.\u00a0 Any money left at the owner’s death would go to spouse or heirs.\u00a0 And there\u2019s also no reduction for spousal benefits above, either.\u00a0 In fact, if the spouse had his\/her own account, you\u2019d add benefits for that to the above totals.<\/p>\n

         <\/p>\n

        Now, can someone tell me again why the Social Security we have today is such a \u201cgood deal\u201d?<\/p>\n","protected":false},"excerpt":{"rendered":"

        As I\u2019ve previously noted, most folks approaching retirement age probably have already figured out that they\u2019re … Ever Wondered Just How Bad You’re Getting Screwed by Social Security?<\/span>Read more<\/a><\/p>\n","protected":false},"author":623,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[5,188],"tags":[],"class_list":["post-31646","post","type-post","status-publish","format-standard","hentry","category-politics","category-reality-check"],"_links":{"self":[{"href":"https:\/\/www.azuse.cloud\/index.php?rest_route=\/wp\/v2\/posts\/31646","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.azuse.cloud\/index.php?rest_route=\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.azuse.cloud\/index.php?rest_route=\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.azuse.cloud\/index.php?rest_route=\/wp\/v2\/users\/623"}],"replies":[{"embeddable":true,"href":"https:\/\/www.azuse.cloud\/index.php?rest_route=%2Fwp%2Fv2%2Fcomments&post=31646"}],"version-history":[{"count":0,"href":"https:\/\/www.azuse.cloud\/index.php?rest_route=\/wp\/v2\/posts\/31646\/revisions"}],"wp:attachment":[{"href":"https:\/\/www.azuse.cloud\/index.php?rest_route=%2Fwp%2Fv2%2Fmedia&parent=31646"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.azuse.cloud\/index.php?rest_route=%2Fwp%2Fv2%2Fcategories&post=31646"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.azuse.cloud\/index.php?rest_route=%2Fwp%2Fv2%2Ftags&post=31646"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}