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Not an Investment

Richard Quinn

IN A RECENT TWITTER post, a man claimed that if all the Social Security taxes he and his employers pay were invested instead, he’d accumulate $1.9 million by age 67. That sum could then generate $95,000 in annual income, he added, which is more than his anticipated Social Security benefit. He concluded that Social Security was “theft.”

Claims like these bother me greatly because they’re often widely read and believed—and they’re nonsense.

Social Security is an insurance program, not an investment plan. It provides much more than retirement income to the worker alone. The Twitter commenter’s claim is like me saying that the $196,124 I paid in Medicare taxes was theft because I haven’t collected that much in health care benefits. I hope I never do.

Of the 65 million Americans collecting Social Security, only 47 million are retired workers. The rest are spouses, ex-spouses, survivors and children of contributing workers, plus disabled individuals.

Looking at my own Social Security records, my wife and I have received in benefits every penny paid in taxes—both by me and my employers. In fact, we got it all back within the first seven years. Since then, we’ve collected $200,000 more.

Someone less fortunate may collect for a short period or not at all. That’s why Social Security is insurance that, in some respects, acts like a pension. For each individual, the goal is to be an actuarial loss—but, no, not everybody can live longer than average.

Social Security benefits are based on your earnings and the program’s benefit formula, not on the payroll taxes paid. Many individuals collect benefits without ever paying a penny in taxes, either directly or by an employer on their behalf.

The investment gurus are going to run the numbers and easily prove the $1.9 million claim, or something like that, is accurate. Yup—if everything works out perfectly from day one. Namely, that the individual has the discipline to save every equivalent penny. That the money is invested wisely. And that he or she doesn’t suffer any major vicissitudes of life, as President Franklin Roosevelt called them. If all these conditions are met, sure, then they’re correct.

Call me cynical, but not many Americans have demonstrated that sort of discipline for long-term saving and investing. That may be why there are always calls for higher Social Security benefits and larger cost-of-living adjustments.

The Social Security trust fund is often misrepresented. The U.S. government has almost $29 trillion of outstanding debt. Of that, $6 trillion is held by intragovernmental trusts, including some $3 trillion in Social Security reserves. Those trusts are effectively accounting items within government agencies.

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The Treasury does issue special bonds to the Social Security trust fund. It also credits those bonds with interest—$76 billion in 2020. In addition, the trust receives income from the taxation of Social Security benefits—$41 billion more. Social Security will redeem those bonds when the income from payroll taxes is inadequate to fully meet its obligations. Where will the government get the cash? Probably with more debt, charged to another account.

Some people are convinced Congress stole the trust money. They say the trust would have plenty of money if it hadn’t. That’s simply not true.

Your payroll taxes, on average, pay for only about 15% of your total benefits. That’s why it was decided that a maximum 85% of our Social Security benefits would be taxed.

Representing Social Security as theft, a rip-off or a Ponzi scheme is reprehensible, in my opinion. That’s like saying term life insurance is a rip-off if you don’t die within the insured period.

No, the real failure is that Congress has ignored for decades the need to shore up Social Security’s finances. Adjustments are necessary as demographics and other factors change. These could have been gradual and relatively minor—if the costs had been spread over generations of workers. Now, we’re in a bind.

Current and future workers must carry the burden of balancing the books. Either that or Social Security must receive an influx of cash from general tax revenue. That would change forever the very idea of a worker-funded insurance program. It would place Social Security among the many programs competing for their share of the federal budget—something Roosevelt greatly feared.

Richard Quinn blogs at QuinnsCommentary.net. Before retiring in 2010, Dick was a compensation and benefits executive. Follow him on Twitter @QuinnsComments and check out his earlier articles.

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Steve Spinella
Steve Spinella
17 days ago

Thank you, Richard. Might your understanding have something to do with having been a compensation and benefits executive?! I find it easiest to think of Social Security as perhaps the best inflation-adjusted annuity I’ve never had to decide whether to purchase (aside from accepting that I wouldn’t be exempt from SS as a minister.) It is in that way a wonderful complement to other kinds of risk I take on as an investor. Occasionally I calculate whether I would be better off to earn more (as self-employed) in order to have a higher benefit–it turns out that is, for me, an almost entirely neutral question, which is in a small way reassuring.

John Wood
John Wood
17 days ago

The nation of Humble Dollar readers are so much more financially literate than the general population, that using one’s own experience on a topic like Dick is raising cannot bring one to the right conclusion. I used to work in the retirement plan arena, where it brought me into contact with both blue (and white) collar workers who had no idea about finances. Social Security is the best thing that happened for folks like these, because there was no way their financial and investment acumen was going to bring them better retirement results than their Social Security benefit.

Bob Wilmes
Bob Wilmes
19 days ago

A fairly large number of state and county employees are not covered by Social Security. There is some interesting information here:
https://www.ssa.gov/policy/docs/ssb/v80n3/v80n3p1.html

booch221
booch221
17 days ago
Reply to  Bob Wilmes

I’m one of those people who worked for a state government and was not covered by Social Security. My employer still took the 6.13% from my paycheck and matched it with their own 6.13% contribution and put it in a 401(a) that works just like a 401(k). I did indeed have a nice chunk of change after 30 years. I can easily see how someone could have $1.9 million after 45 years, depending on what mutual funds they invested in, and if they also contributed the employer match.

Last edited 17 days ago by booch221
R Quinn
R Quinn
19 days ago
Reply to  Bob Wilmes

One of the strategies to help fix SS funding is to have new state workers be part of the system.

Roboticus Aquarius
Roboticus Aquarius
19 days ago

Excellent discussion of the realities of SS.

Given my investment and saving record, I know that I too could have been far better off investing that money on my own… and yet I also know that’s emphatically not true for many if not most Americans, as you rightfully point out. In part, SS fulfills the necessity of standing up for our fellow citizens, and I think that it’s a great program.

Implementation of SS coincided with a drastic reduction in the percentage of elderly Americans living below the poverty line. The linkage sounds obvious, though I think some objections could be made that there were other factors also at play. Still, poverty among the elderly declined by roughly 2/3 from 1959 to 1985 from over 35% to about 13%.

corrupt
corrupt
20 days ago

Don’t we pay taxes on 50% of our social security withholdings when they are initially paid (we don’t pay taxes on the employers 50%). SS should only be taxed on a maximum of 50% of what is received.

R Quinn
R Quinn
20 days ago
Reply to  corrupt

The taxes are unrelated to your benefit collected. It’s just a tax.

your payroll taxes – up to the limit- are not sufficient to pay your benefit over your retired lifetime. If that were the case, then your and my benefits would stop when we have collected an amount equal to all taxes paid for and by us.

As I mentioned in the article, in the aggregate what workers pay in taxes covers about 15% of benefits collected. Hence the 50% and 85% limits on taxing the benefit.

Last edited 20 days ago by R Quinn
corrupt
corrupt
16 days ago
Reply to  R Quinn

How can you say it’s unrelated when what you get is based on what was collected?

David Lamb
David Lamb
15 days ago
Reply to  corrupt

Read the article again…”what you get” is based on what you earned – your “earnings record” – NOT what you (and your employer) paid!

J Cp
J Cp
20 days ago

Social Security is not insurance or a pension as defined by any common understanding and it’s constitutionality is based the “general welfare” clause found in the constitution. It is risible to say but Social Security is a welfare program. Payments do not give rise to any property rights in future benefits. Future benefits may be curtailed or even eliminated by Congress. Not that is desirable or politically feasible but it is possible.

Current Social Security recipients receive their benefits via taxation on current workers’s wages. The trust fund is simply an accounting entry sleight of hand. All of the trust fund is held in government IOUs which must be paid via current taxation.

Today’s workers are under no moral, or ethical obligation to fund social security. However they are under a legal obligation enforced via taxation to fund it. But this compulsory tax can be altered or eliminated the political process. Even with the taxation in place the money can be used for t other spending.

Wikipedia has two excellent summaries of Surpreme Court cases re. Social Security

Helvering vs Davis
“The proceeds of both the employee and employer taxes are to be paid into the Treasury like any other internal revenue generally, and are not earmarked in any way. The Social Security Act of 1935 does not contravene the Tenth Amendment, as Congress is permitted to spend for the general welfare.”

Fleming vs Nestor
“The Court ruled that there is no contractual right to receive Social Security payments. Payments due under Social Security are not “property” rights and are not protected by the Takings Clause of the Fifth Amendment.”

David J. Kupstas
David J. Kupstas
15 days ago
Reply to  J Cp

I would agree that Social Security is a welfare program. Benefits as a percentage of pay are higher for lower-income workers than they are for higher-income individuals. And, as Richard points out, “Many individuals collect benefits without ever paying a penny in taxes, either directly or by an employer on their behalf.”

R Quinn
R Quinn
20 days ago
Reply to  J Cp

And what is your point?

I said the benefits were not related to taxes paid. SS operates under a law and like any law it can and has been changed over the years.

It is insurance perhaps not by strict definition, but in the sense money is paid for a promised benefit in return. The fact it covers events of death and disability enhances that perspective.

In effect, the tax revenue is used for other purposes as the Treasury borrows from the trust and pays interest just as it does from individuals buying treasury paper.

I doubt there are contractual rights for any benefits provided by government (like SNAP, Medicare, or anything else) so I don’t see the relevance of your comments.

Roboticus Aquarius
Roboticus Aquarius
19 days ago
Reply to  R Quinn

While yes, technically SS is a wealth transfer tax, it operates as if it were an annuity. This is intentional, and built around political considerations. Like you, I don’t see how this is really important to anyone trying to plan for retirement.

wtfwjtd
wtfwjtd
21 days ago

…and yet so often, that same person who claims they could do (way) better by investing their Social Security payments, hasn’t managed to achieve anything close to the actual returns they claim they could generate with the money that they do have to invest. Which is a real-life way of demonstrating rather convincingly and forcefully the points about Social Security that you make in your article. How ironic!

Harry Crawford
Harry Crawford
20 days ago
Reply to  wtfwjtd

I do think that if the government invested Social Security taxes in index funds, like 90% S&P 500 and 10% bonds or some other %s, that Social Security would indeed have more money to cover the benefits that are owed to current and future retirees. I’d like to see a calculation using real annual SS taxes paid to SS and real SS benefits paid out, with the difference invested in index funds to see if I am correct or not.

R Quinn
R Quinn
20 days ago
Reply to  Harry Crawford

I agree, at least a portion of the trust could be better invested.

Rick Connor
Rick Connor
21 days ago

Excelent article Richard. In my younger days I used to be one of those who thought I could do better by investing my payroll taxes. With age I earned a better understanding, which you have eloquently provided in your article.

My recent years doing volunteer tax returns for seniors dramatically showed how many seniors depend on modest social security payments. In those cases, the program does was it was intended to do, raise average older citizens out of poverty.

R Quinn
R Quinn
21 days ago
Reply to  Rick Connor

It always amazed me how many people can work a lifetime and end up living on SS in retirement. It would be interesting to know how that happened. We’re they always poor with a factual inability to save or is it a result of lifestyle and life choices.

My parents were like that. Not poor, but modest income, but so scared by the depression they would never invest. They lived only on SS in retirement.

I once convinced my mother after much effort to buy 75 shares of the company where I worked, but I never could convince her to enroll in DRIP. She just spent the few dollars each quarter for thirty years or so.

booch221
booch221
17 days ago
Reply to  R Quinn

I know a lot of people who are in this boat. For some it was a lifestyle choice, they could have saved a little but didn’t. For others, they have low paying jobs and are always struggling to make ends meet. There is no money left over at the end of the month to save for retirement.

Last edited 17 days ago by booch221
Guest
Guest
21 days ago

Those who are opposed to immigration should be mindful that, absent immigration, there will be far fewer workers per retiree than we have today. Unless we allow for smart immigration our demographics will look as poor as they do for Japan, China, and many other countries which will have a direct impact on payments to retirees.

R Quinn
R Quinn
21 days ago
Reply to  Guest

Not only that but illegal immigrants pay SS taxes, but never collect benefits. That’s a plus for the trust of tens of millions a year – not that we should promote illegal immigration.

Chazooo
Chazooo
17 days ago
Reply to  R Quinn

It is my understanding illegals can collect SSI payments as well as SNAP, Medicaid, and other various welfare assistance.

booch221
booch221
17 days ago
Reply to  Chazooo

You must watch a lot of Faux News.

Harold Tynes
Harold Tynes
21 days ago

Look to Railroad Retirement for a government run program that has adapted to changes in actuarial values to maintain full funding and benefits.

IAD
IAD
21 days ago

It seems the vast majority of our problems always stem from the actions or inactions of our elected officials. The real scheme are those in Congress that have been there for decades that have ignored issues such as not shoring up social security.

R Quinn
R Quinn
21 days ago
Reply to  IAD

The name of the game is to make promises while avoiding raising taxes to pay them. But in large measure it’s our own fault, we don’t want the full story or the truth about what things cost or if they are paid for.

An
An
20 days ago
Reply to  R Quinn

How true. I remember one year my former employer sent out individualized total compensation statement to each of the employees that included our wages and the portion of our various benefits that the company paid. I found it very informative and the company being transparent. Though everyone else complained that it was just the company scheming to keep wage increases low.

Last edited 19 days ago by An

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