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Righting Wrongs

Richard Quinn

SOCIAL SECURITY remains a great mystery to many Americans and is widely misunderstood. For instance, when Social Security’s trustees release their annual report, we get vastly different interpretations. One group will read the report and conclude there’s a “surplus” and plenty of money to improve benefits. Meanwhile, another concludes that the program is in fiscal trouble and fixing it is vital.

Headlines frequently state the program is going bankrupt. It isn’t. Today’s level of benefits may not be sustainable, given current funding sources, but Social Security payroll taxes are sufficient to maintain the bulk of benefits currently paid. A recent survey indicates that 76% of younger American are concerned that Social Security will not be there for them. It will be.

On top of that, many older Americans don’t believe Social Security keeps up with inflation. They don’t understand the formula for each year’s COLA, or cost-of-living adjustment.

In response to one of my articles, a reader declared: “Senior Citizens that are Citizens of the United States of America should have, AT THE VERY MINIMUM, a 3.6% COLA raise for 2019, and at least that much for years to come!!!”

Another commented: “So, yes, Mr. Quinn… Social Security does not keep up with the rising costs.”

Frequently, I receive comments like this one: “Why do you keep writing about the ‘trust fund’ as if it matters even a whit as to the financial health of Social Security? In doing so, you are perpetuating a gigantic lie about Social Security.”

Yes, the trust fund is an accounting device. Yes, its assets are special Treasury bonds. But yes, it is real. Look at Treasury Direct and you will see debt held by the public and intragovernmental debt. The last category holds $5.8 trillion. It’s where the government accounts for several trust funds, including the trust funds for Social Security and Medicare Part A.

The trust is nothing but IOUs, some people say—just pieces of paper. That’s like saying the savings bonds in your safe deposit box or the bonds you hold in a mutual fund are just pieces of paper.

While many people seem to think Social Security is a bad deal financially, others realize what they have received. The following comment expresses that feeling: “I am 63 and started my SS benefits at 62. I made just $300,000 [in total] during my work years. So, I am one of the working poor you are talking about. I will have everything that was paid in [payroll] taxes by myself and my employers back in just 67 months and I even adjusted the amounts to 2018 dollars. The SS system is one of the best programs that our government has ever come up with.”

I looked up my own Social Security record and found something similar. In just seven years, my wife and I received more in Social Security retirement benefits and spousal benefits than all the Social Security payroll taxes my employers and I paid since 1959.

Finally, there are those taxpayers who claim they would be better off investing Social Security payroll taxes. Many variables are part of any such calculation. But suppose you earned $50,000 a year for 35 years and saved 12.4% of your pretax income, or $517 a month, in lieu of the combined 12.4% employee and employer payroll taxes used to fund Social Security. If you earned 4% a year—a healthy return, because we’re assuming 0% inflation—you’d have $474,000 after 35 years. Using a 4% withdrawal rate, that would give you $19,000 a year in retirement income—some $1,500 a year better than the average Social Security benefit.

Does that mean a privatized system would be a better deal than today’s Social Security? Maybe not. Consider seven issues with a privatized system:

  • Can average Americans save without interruption throughout their career—and without raiding the funds they set aside?
  • Can most individuals handle the complexities of investing or the gyrations of the financial markets?
  • What about disability payments—something available from the current Social Security system?
  • What about the Social Security survivor benefits often paid to families if a worker suffers an early death? If we privatized Social Security, will workers be prudent and buy adequate life insurance?
  • How will marriage, divorce and remarriage be handled in a privatized system? All that’s accounted for in today’s Social Security spousal benefits.
  • Once retired, how will folks keep up with inflation in a privatized system?
  • What about survivor benefits for widows and widowers?

Love it or hate it, Social Security is a vital investment for nearly every American, and we need to keep the program on a sound financial footing.

Richard Quinn blogs at QuinnsCommentary.com. Before retiring in 2010, Dick was a compensation and benefits executive. His previous articles include Basket CaseBad to Worse and Missing the Point. Follow Dick on Twitter @QuinnsComments.

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David J. Kupstas
David J. Kupstas
2 years ago

One time, I was asked to do an analysis concerning someone from Canada who improperly didn’t have FICA taxes withheld from his U.S. paycheck. How much should the company pay him as a lump sum to make up for this? After looking at what should have been withheld, investing it at a reasonable rate, then what he would have gotten in additional SS benefits, I concluded he was actually better off not having the dollars withheld. They needn’t pay him a dime. I will note he was a higher-paid employee. I just thought this result was funny.

Jay Thomas Esrom
Jay Thomas Esrom
2 years ago

It’s all good until the Feds start taxing all benefits to death to keep the program “solvent”.
The Gov’t taketh and then giveth back, but taketh again with taxes….

Mik Barbasol
Mik Barbasol
2 years ago

Richard…please don’t confuse the public with facts…you might hurt their feelings.

Francis Sam
Francis Sam
2 years ago

This is a great, asking whether you’re able to meet or exceed the promised benefit that the SSA provides you.

For the few people that have defined-benefit programs, I hope you encourage them to do a similar analysis. That is, if you take the lump-sum, could you meet/exceed the return that the monthly payout offers (of course taking into account everything you mentioned in the article e.g., volatility, emotions)?

I did something just like that for my mom; presuming 5% growth/year, if we set up her portfolio to match the the payout they offered, the lump-sum would be depleted in ~4 years. It was an easy choice to take the monthly benefit after seeing the high-water mark.

If she kicks the bucket in <4 years, we lose out on the principal (less than $50k). Each day over that mark is pure return.

Joel Ziebarth
Joel Ziebarth
2 years ago

Nice discussion Richard.
Your illustration assumes that your employer would voluntarily give you a 6.2% raise if the government didn’t require them to pay into SS.
That’s a stretch!
SS is a blessing for virtually all people who need it most and probably is at least OK for many of your readers.

Roboticus Aquarius
Roboticus Aquarius
2 years ago

SS is an especially good deal for those who made less in their working lives. It’s designed to replace 40% of pre-retirement wages. For those who make more, it scales down to 30% wage replacement or so. That might be about 33% in my case

I’m in that group that will be retiring right about when SS is expected to hit it’s financial low point. For me, 33% may become more like 25%. However, I suspect higher earners will take a bigger portion of any cuts vs lower earners, so I worry that I might get closer to half my promised benefits. This would be difficult, especially on top of having had my pension slashed dramatically already. At least nobody can take my 401K.

SchmidtyFi
SchmidtyFi
2 years ago

The trust fund might matter from a legal or accounting perspective, but not in any economic sense. The fact it exists doesn’t reduce the burden on taxpayers.

If that fits into your definition of “being real”, well, what can you do.

As for the safety deposit box comparison…corporate bonds held in a private account are nothing like these IOUs. Bonds like that are used to raise capital that allows the corporation to grow, which allows the corporation to pay the money back — that’s real economic growth.

And, unlike Social Security’s IOUs, even government bonds held in a private account can be traded and therefore have a market price (which constrains the Government’s ability to create them).

Eagle Wings
Eagle Wings
9 months ago
Reply to  SchmidtyFi

And corporations of course never go bankrupt, and always pay you 100% of the bond amount back, guaranteed, right?

And I love the talking points of how it allows “corporations to grow”, when in reality, most extra corporate cash goes to stock dividends or management bonuses. It isn’t to grow the company or pay their employees better, that’s for sure.

OBWankinobee
OBWankinobee
2 years ago

One thing that is often left out of calculations comparing Social Security with private investments is that Social Security includes insurance for eligible family members, insurance for disability, and insurance for eligible survivors. True, not many retired people have eligible spouses or children, but some do. And true, disability is hard to get, but a lot of people do get it. But for people who die young and leave spouses with children, Social Security is a substantial help.
Like car or home insurance, we have to have it, and hope we don’t need it. But this extra insurance has value which is usually left out of calculations.

SchmidtyFi
SchmidtyFi
2 years ago

Regarding the “Trust Fund”, read, for example, this: https://fee.org/articles/the-myth-of-the-social-security-trust-fund/.

This is also a great explanation: https://www.forbes.com/sites/ebauer/2018/05/05/the-social-security-trust-fund-is-real-but-so-what/#422f349b3c4a.

About the “Return on investment”, read, for example, this: https://www.heritage.org/social-security/report/social-securitys-rate-return. Example from it: “[T]he expected rate of return from Social Security for [African Americans] born after 1959 is negative”

I love reading older Americans say what a good deal Social Security is for them. Yeah, you’re the winners, and even then if you had any financial sense and personal responsibility you’d have crushed the return.

So, yeah, long-lived financially irresponsible baby boomers are better off with it, at tremendous expense to your children and grandchildren.

parkslope
parkslope
2 years ago
Reply to  SchmidtyFi

You also appear to love cherry picking opinions from right-wing “think” tanks.

AJ
AJ
2 years ago

Unreal. Yes, SS is great for older Americans. Due to life expectancy, pharmaceutical advancements and others, seniors are taking far more out of SS than putting in. That’s not political, it’s fact. Check out the non partisan CBO if you don’t believe me.

Financial planning should estimate those around age 50 will get about 70% of their stated benefits. Yes, you will get them, but either taxes are going way up on the shrinking working class or benefits are getting trimmed, or both as the debt will be unsustainable in a decade or less.

It would be nice if financial planners would stop kidding the clients, and it would be nice if we avoided generational warfare in the process.

It’s going to be there. Unless major changes occur, it will impact both workers and retirees. Plan for it.

Michael
Michael
1 year ago

With 6 million people out of work suddenly, where will social security get money?
Isn’t this crisis a gift to ss naysayers?

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