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One thing (?) really bothers me and that is the idea that Social Security is a bad deal. That view is based on the theory that a person would be far better off if the FICA taxes instead of going toward Social Security, were invested by the worker.
There are two major flaws in that view. First, Social Security is far more that a individual retirement income – disability benefits, survivor income, dependent income, ex-spouse income are included.
So, for the theory to have a chance, everything must go right throughout a persons entire life, no job loss, no disability, no divorce, no disabled child, no early death and no bad investments or bad timing.
Second, we must assume a person exercises forty or so years of financial discipline and investment skills. No diverting any of the money, no skipping new investments, no speculation, good diversification based on years to retirement and more.
I suggest relatively few people are capable of doing that and I think the overall financial state of many retirees and most Americans provides ample evidence.
So, the argument against SS based on what one person expects to successfully do is irrelevant in my opinion. The collective benefits for society are what matter.
During my working life of over fifty years beginning in 1959 I and my employers combined paid $266,314 in FICA Social Security taxes. I have no idea what that would be worth if invested in lieu of the taxes as paid weekly, but I do know that Connie and I collected in benefits all those taxes paid in about seven years of retiring and that today after sixteen COLAs, our combined SS benefits based on my taxed earnings only are $60,496 a year and the survivor benefit would be $40,320. And all that is about as guaranteed as is possible.
Did I miss out on accumulating a million or two? I doubt it, but I also don’t care. In my book Social Security still wins. I see that as the case for 99% of workers, even HD readers.
Richard,
I agree with you. That’s why I think you’re a genius.
Dave
https://taxfoundation.org/podcast/all/social-security-funding/
What do folks think about this?
https://erictyson.com/articles/making-everyone-stockholders-social-security-choice
I’m not advocating for it, curious about people’s reactions.
The premise of this article is that we could create a Social Security Choice program that would allow FICA tax payers to divert a portion of their FICA taxes to an investment account that they would later receive at the time they take SS payments. My question is what is there leftover to invest? That tax money, from what I understand, goes immediately to paying beneficiaries, and there isn’t anything left. If you divert a portion of those payments into a long term investment account, you are effectively cutting the payments to current beneficiaries without the associated boost of having the corresponding long term investment growth. It’s just cutting benefits. I’m not confident this author understands how social security works, but then again I don’t really either 🤷
All I have to say about the idea is it’s redundant, because we already have several retirement accounts for investing. It also deviates from the goal of social security, which is to establish a floor for income in old age/disability and protect all Americans from destitution.
Why should someone be punished because they choose to invest their Social Security deductions into a personal account (with the hope for a better long term outcome) rather than using the current method? I say that Social Security should have two options: (1) The current method being used as well as (2) allowing future recipients to have a personal account where they are able to invest as they may choose. Those who are willing to assume more risk and are willing to “sink or swim” and accept an uncertain final outcome should not be penalized.
Another thing I’ll add is that the money you pay in SS taxes is not your money. That money belongs to current beneficiaries. It’s not about your risk tolerance or your future retirement, those things are totally irrelevant. It’s about the risk tolerance of the entire program and all of its current recipients. This is safe money, about as safe as it’s gonna get. There is no tolerance for risk, certainly not stock market risk, because this needs to work 100% for every recipient. 99.99% is not good enough, since it would mean failure for 690,000 Americans. If you want to take risk, do it in your retirement accounts, or your brokerage account, but social security money is not an appropriate place for that sort of thing.
As for the language of being “punished,” why should another recipient be punished with benefits cuts just so you can invest your portion instead of contributing to the program? That’s hardly fair 😐
That money is taxes, it doesn’t belong to any group. FICA is under a separate law, a tax law. SS was structured to give people a sense of ownership, that their taxes were going to their future income, but it just a tax, a tax unrelated to any benefits a person or family may receive.
I suppose I’m ignoring the people who are self-employed, but all I’m pointing out is that at no point was the FICA tax money ever in your possession if your paying via normal employer payroll taxes. It never hit your bank account, nor was in any way yours before it went to the government. Since that money goes to SS recipients, I feel like it’s fair to say it really belongs to them. My real point is that those paying in now are not literally paying into a fund to support themselves later, they’re paying for the benefits of current recipients, so it’s not exactly like a retirement account. Am I off in that broad simplification?
It’s not a retirement account, there is no individual accounting. Those paying taxes today are paying the benefits for people like me.
There is no relationship between taxes a person pays and the benefits they collect. Benefits can and have been changed without changing the taxes.
Let’s say two workers have identical earnings their entire lives, they are the same age and retire the same day. Do they get the same benefits? Maybe.
The person married will get a lot more if the spouse had no earnings. One could even get married a year before retiring and up the family benefit by 50% never having paid for that extra benefit.
Even more, if the new spouse is the mother of the workers child the one year rule does not apply.
Taxes, interest, income taxes paid on taxed SS benefits go into an accounting trust, benefit payments come out regardless of what you may have contributed.
So, when someone says I paid into SS all my life, it’s my money, I paid for my benefits, they are whistling in the wind.
Totally agree!
Because you won’t be able to fund the system properly if you let people opt out like that. It’s designed and intended to prevent destitution in old age, not be the maximum return on investment. And you can already do this in many ways anyway through various retirement accounts. We don’t need to reinvent the social security wheel here, and self-directed investment is not an appropriate choice for the intentions of this program anyhow.
And what happens when people sink? Society lets them drown or in this case starve on the street?
There are plenty of opportunities to invest as one chooses and a big chunk of the population has demonstrated their inability to handle that.
Individual responsibility sounds good in theory and in a perfect world it’s logical, problem is there is no such world.
That’s why 2/3 rely on SS for more than half their income and 27% rely only on SS. That’s why just more than half of all families have any retirement account. And it’s not because they pay 6.2% in SS FICA.
Also, mention that 6.2% annual FICA rate, that’s not enough to fund a stable retirement anyway, so the investment point is kinda moot.
Good point.as is your funding comment.
And if folks choose 2) and end up with nothing for retirement, are we to leave them starving and sleeping on the street corner?
I think that Social Security is a good thing. However, it’s not really an insurance program and never has been. Those with low lifetime incomes get a much higher return on their FICA taxes than people with higher incomes. It’s a vital security net for them.
Indeed it is insurance, for survivors, dependents, disabled, even ex-wives. It is far more than a workers pension. Many people can benefit one way or another without ever paying a penny in taxes.
The calculation (bend points) does skew toward lower income, but I wouldn’t call it a much higher return. It’s simply all or most of their earnings were subject to both taxes and higher benefit factors.
A pension plan I ran did something similar giving a higher percentage per year of service up to a Social Security integration point.
The “I” in FICA stands for “insurance” though 🤷
For many people it turns out to be their only source of income for retirement. While I wouldn’t recommend it, what would happen with those people if it weren’t for that money.
I don’t have hard numbers in front of me, but I suspect the people that were in the system fairly early on (such as Dick who started in 1959) will make off quite well, and those in the system later on will not do as well.
Yeppers! It’s time plus consistency that is a basic investment procedure to have success. SS is so simple and if we take advantage of the opportunity, it can last the rest of our lives, allowing us to live large.
The average person, if handling their own SS investments, would probably sell in a bear market, after it went down, and if they got back in would wait until it went up. Sell low/buy high syndrome. Also, most would pick bad investments because the average person doesn’t know how to invest, so the returns could be horrible.
SS is a great deal for everybody, but there could be a few who would be better off. My calculation is that if you invested every cent in equites for yourself, like S&P 500 was 100% diligent, and at 8% average return per year, then you might have had a million dollars more, but many things have to go near perfect. Social Security is the best for the masses, and we should all be very pleased with a system that has helped many.
It is NOT a great deal for “everybody”. If a married couple contributed in all of their working years, then pass away before receiving benefits, they are not getting such a good deal. If their children are not minors, they receive nothing. It would be better for the family if some of the FICA payments went into a personal SS fund that allowed account growth and distributions to heirs for such common situations.
Few people are in that position. But that’s why it’s insurance and not an investment. You can say the same thing about any pension. The FICA payments are just taxes nothing more, nothing guaranteed. It could not function as you suggest. The cost of any pension or annuity is based on a combination of actuarial gains and losses, just like health insurance needs low and zero users to offset those with high health care costs.
A fellow once asked me, ‘what kind of money would you have to have invested, to get the payout provided?’ And get the COLA to boot.
I don’t really like the “bootstraps” mentality that comes with the notion that you could’ve invested your FICA taxes to get a better return. There is absolutely no guarantee that we will see good or even positive returns going forward, it’s a total crapshoot. Almost nobody has that kind of discipline anyway, and I think it’s naive to think employers would just pay the employ it’s share of FICA taxes. Why would they? That’s easy cost savings, and I’ll tell you right now the majority of workers have no clue about that money.
Exactly right, that is a fantasy applicable to perhaps 10% of the population. In a society of 340 million the idea that with more of their own money to keep citizens should and can fend for themselves is naive beyond belief.
340 Million? You’re talking about the entire American population. For the year 2023, only about 183 million Americans paid FICA taxes.
I’m talking about a society now and in the future able to invest in lieu of Social Security
Only one prior comment has presented detail knowledge of the SS benefit calculation – thanks BenefitJack. The actual formula is not presented in a straight forward manner on the SSA website, so it can take a while to tease out the details. But, the details, specifically the bend points, determine the winners and losers.
The bend points favor lower income earners providing a higher percentage overall on their earnings. How does that relate to winners and losers?
That’s more to do with longevity and in some cases such as mine, which a spouse’s benefits come from the sole earner.
A real winner is the worker with a non working spouse or perhaps an ex- spouse as well who had the same earnings history as a single worker.
The question at the end of your first paragraph is answered by the first sentence in that paragraph.
When the benefiting variables you mention in your second and third paragraphs are held constant at low or high earnings levels, the result does not change.
If I take SS “early”, I get to invest it at current compounded Money Market rates around 4.2%. This makes up much of the difference of waiting to age 70 to file. Still get the inflation protection. I am taking out insurance against dying early. I view 60K in SS benefits as a 1.5M dollar bond at 4%. Guaranteed, no default, inflation protected, preferably taxed with survivor benefits. Allows people to take their risks somewhere else.
Certainly, some people immensely profit from Social Security’s formula, with highly progressive bend points. That was certainly true for the Greatest Generation, for the Silents, and may also be true (time will tell) for the Baby Boomers – if you look at each generation in its entirety.
However, that does not mean that everyone in every group receives benefits that exceeded their contributions.
On the other hand, those who contributed the maximum for most years, those who worked and paid into the system for more than 35 years, those whose wages far exceed the Social Security Wage Base, clearly do not receive a positive “return” from the system. You can’t look simply at the worker’s own contributions, which are net, after taxes (federal, state, FICA, FICA-Med). You also have to look at the employer’s contribution (which most economists would assert are foregone wages) and the time value of money.
As a simple example, consider Medicare Part A, Part B, Part D and Medicaid. I once calculated what the FICA-Med taxes an individual reaching age 65 in 2021 needed to pay, to qualify for non-contributory, dual eligible, 100% coverage – 40 quarters of FICA-Med contributions of $723.84 during ten years in the 1970’s (plus an additional, equal amount from the employer)! Keep in mind that the estimated monthly premium for Part A coverage in 2021 was $471, so, the cost of Medicare Part A coverage alone could exceed the worker’s contributions in as little as 2 months (actually one month if there is a spouse the same age who did not work for wages).
To fill out the comparison, consider that almost all of government funding of Medicare Part B, Medicare Part D, and Medicaid comes from general revenues, and, most of that comes from income taxes – where half of American households pay only about 3% of income tax revenues (significantly different, much more progressive taxation in the 21st Century compared to the 20th Century).
Social Security and Medicare are wealth transfer systems – from higher income to lower income, from younger generations to older generations.
Social Security and Medicare are not contractual obligations, but entitlements, and most younger Americans are concerned that they will not get the benefits Congress promised – benefits far in excess of the taxes Congress was willing to levy. This was, is and continues to be Congress promising more in benefits than it is collecting in new taxes/revenues to garner support. Recent examples include George W. Bush and Medicare Part D, and President Biden and the “Inflation Reduction Act” Medicare Rx changes.
People need to be straightforward about where the funding comes from and where it goes – and, importantly, if Americans want to maintain these entitlements in their current form, we need to carefully guard younger, working Americans support (those who will be called upon to shoulder the bill) in the decades to come.
You’re too cynical, overly analytical, Jack. It’s not a matter of positive return or not, it’s insurance with winners and losers, but mostly winners. Call it wealth transfer, it doesn’t matter. It’s taxes, not an investment.
it’s a big society and our combined risk for retirement and health care needs to be shared or nothing works, whether we like it or not, fair to some or not.
I paid my FICA taxes for 52 years. Connie collects on my earnings.
In fixed dollars we have received considerably more than all my and my employer taxes paid. We have received hundreds of thousands in medical benefits under Medicare. We pay IRMAA premiums.
I had a totally disabled nephew from birth who never could speak or move let alone work and he collected SS. A lifesaver for my sister. Yeah, somebody else paid.
In a perfect world things might be different, most people wouldn’t rely on SS in retirement. That will never be the case.
The fundamental problem is not paying the full cost of what we want and thinking it will all go smoothly. It isn’t and won’t and a big segment of the population will never be able to go it alone.
I totally agree Dick. Most people could not sustain their discipline for a few years, let alone 40 years.
I could make do without SS but I live a lot better with it. For many people, it is their retirement income. They would be destitute without it.
Aren’t like 75% of people (or more depending on how the question is phrased) in favor of maintaining Social Security and shoring up it’s finances?
I suspect that this level of support makes scrapping SS a fever dream for some libertarian types but that’s about it.
I tend to agree that the individual investing the SS tax money is a gamble. However, if a portion of the trust fund had been invested over the years, the current shortfall would have been eliminated. If the stock market goes bust, there won’t be a government to hide behind.
Actually that is not accurate. According to the CRFB SS reformer, diversifying investments will only close 6% of the funding gap and with increased risk.
I believe the CRFB calculator projects the impact of policy changes going forward. For example, the Trust Fund held $23B in 1957 (the year I was born), hit $1T in 2000, $2T in 2006, and peaked at $2.9T by 2020. I think Dan was referring to investing a portion of the past trust fund assets.
Yes it does, but this particular estimate assumes the fund starts fully solvent, which of course is not the case.
I can’t imagine the market turmoil if the government dumped a trillion into the market and then managed those investments. There would not be a viable market IMO.
Besides, there is nothing wrong with the way it works.
Here’s another issue: The trust fund is just special government bonds. If some of those bonds are turned over to the Treasury so there’s money to be invested, the Treasury will need to come up with cash. But how? If we’re trying to avoid exploding the federal government budget deficit, taxes will likely need to go up. Will we definitely be better off? Will folks be happy with the higher tax rates?
Which is what it has to do now as the bonds are gradually being redeemed to pay benefits. I assume that cash is coming from new bonds sold elsewhere-debt for debt.
Dave Ramsey came out with a study in 2023 “Today’s Retirement Crisis” that was based on a 2016 survey. In that study it was stated that 42% of Americans were not saving for the future and that only 10% save at least 15% of their income. I’ve also read that the 2022 Federal Reserve survey of Consumer Finances SCF (the most recent) stated that fewer than 55% of families had retirement accounts.
This underscores Quinn’s position about the importance of social security.
My Dad was born in 1919, served all throughout WWII in the Navy having enlisted before the war to avoid being drafted in the Army. After the war, he used the GI Bill to get a degree. He raised 6 kids, took care of my ailing mother with devotion and compassion, and sold pharmaceuticals for over 30 years for Wyeth Labs. He retired on his 65th birthday with a pension of just $800 or so a month, not indexed to inflation. Without SS he would have been unable to survive on his own. When he retired, his house was paid for, so was his car, and as a widower, his expenses were low and like so many in his generation, he just lived within his means. He had a wonderful retirement living on what he had. He golfed 4-5 days a week and traveled like crazy, even in his 90s. I did his taxes for about the last 15 years of his life and every time I did them I marveled at how SS made his retirement possible. His pension and SS never exceeded about $28,000 but that man managed to enjoy virtually every day after 65. There are so many others across the country, similar to my Dad, that will need SS even after doing everything “right”. I just hope our Congress can figure out a way to make SS work long term because so many will need it.
My Dad was born in 1910. My parents had minimal savings – in a savings account. They lived only on SS, they didn’t do much of anything in retirement or before for that matter, but they survived and paid their bills only because of SS.
I agree. Besides fixing the current shortfalls in social security, I’d like to see it strengthened since it does function as the dominant retirement income stream for so many people. Human nature being what it is, I doubt that will change anytime soon.
And there are other ways to pay for it, taxes is just one way. Another way is to lease Federal lands for mineral rights, and the government collects rent and takes equity in the company that is accessing the natural resources.
The money collected goes to the SS Trust to fund the unfunded liabilities. Ok, let’s hear some other alternatives to funding the SS Trust, and raising the age limit on (FRA) is OK with me (scaled to age 70).
The bigger question is, does Congress have the will to fix the shortfall in the SS Trust?
It should be increased and paid for.
Suppose we let folks invest their FICA taxes. That immediately raises three questions:
1) How will we pay current Social Security benefits without generating a huge federal budget deficit? After all, we use those FICA taxes to pay benefits to today’s retirees.
2) What if Americans collectively are super-successful in investing their FICA taxes? What happens when they go to spend those dollars? Remember, dollars, stocks, bonds and mutual funds are just mediums of exchange. If they’re to be cashed in and spent without causing a spike in inflation, somebody needs to produce the goods and services demanded. Hands up, all those retirees who want to return to the workforce to produce those goods and services?
3) What if Americans are horribly unsuccessful in investing their FICA taxes? How’d you feel about having a senior sleeping on every corner? I’m not sure that’s the society I want.
Larry Kotlikoff has a proposal worth studying: https://larrykotlikoff.substack.com/p/the-personal-security-system-fundamental
Not my cup of tea. Too many moving parts for one thing. My view is that going forward the taxes need to be skewed more to employers. A form of defacto pension.
Amen!
While I agree with the point you are making, your numbers overstate your case unless they are adjusted for inflation.
And there is the challenge with SS and why I believe some believe the need to invest (perhaps not 100%, but some %?) of FICA taxes. The program can not be financially sound when we get paid back in 7 years what we spent a lifetime contributing.
I’m not for upending the program; but believe the “use today’s dollars to pay todays retirees (and disabled, etc…)” just can’t work long term.
I don’t know the answer, but perhaps something in between what is done today and the privatization mumblings could be in order?
Exactly, Rick. The case made by RDQ perfectly illustrates how/why the program has gone broke.
The program has not, nor will it, go broke. Worst case right now “If Social Security trust funds are depleted, beneficiaries could face a 21% reduction in their monthly benefits.” As long as we have workers, they and their employers will be paying into the system to keep it from going bankrupt.
I’m not sure introducing middlemen through privatization is going to make it solvent. It hasn’t worked effectively for healthcare, I don’t see any reason it will work for SS.
The middlemen in healthcare ie insurance has been warped from the original intent of insurance – to pay for unplanned, unaffordable bills to why wasn’t my $80 office visit and $20 Rx covered in full?
I don’t know Rick, it has worked for 80 years. What we need to accept is it can’t work if the income is not regularly adjusted to reflect demographic and other changes.
My pension is from a plan that has worked since 1911, but the sponsor costs sure haven’t been steady. It wasn’t even funded until 1967.
We should applaud politicians who keep SS solvent instead of vilifying them. We Americans just can’t seem to grasp the idea of paying the bill as opposed to increasing the charge balance or in this case depleting the savings account balance.
Fixing the program is not that hard.