Social Security has been in the news a lot lately, given that it, along with Medicare, have the biggest chances of bankrupting the country’s financial health. With tens of millions of Baby Boomers about to enter retirement and the associated programs of Social Security and Medicare, unless serious steps are taken soon to get both programs under control, the future of the United States and the freedoms it should afford us will be serious jeopardy.
The big question is whether or not the American political class has the brains and the backbone to step up, make the difficult and unpopular choices, and fix the situation. Early indications are that they are not, given what happened when the President’s Deficit Reduction Commission proposed, after months and months of analysis, changes to the current Social Security parameters in order to save it from insolvency. Quicker than you can say politics, Nancy Pelosi jumped up and vowed there would not be any changes to Social Security but gave no indication on why there should not be any changes, proposed an alternative solution, or gave any indication she understood the underlying numbers.
If she did take a few minutes to understand what a scam and con job the Social Security program has degenerated into and how it is unsustainable as currently configured, she would not look so ignorant. Recent and not so recent reputable analyses show how bad this program actually is from a financial and freedom perspective, making you wonder why anyone would want to keep the program as is:
– A recent Associated Press investigative report highlighted the work of two economists, Eugene Steuerle and Stephanie Rennane from the Urban Institute think tank. Their research examined just how well the Social Security program performs financially and whether it is a good investment vehicle for individual citizens. In the AP article reporting their results, the two economists looked at an average-wage, two earner American couple earning $89,000 a year. Upon retiring in 2011, they would have paid $614,000 into the Social Security program.
But according to the payout schedule and the Urban Institute analyses, this couple can expect, on average, to receive only $555,000 in Social Security benefits. Thus, this analysis shows that as an investment and retirement vehicle, the Social Security program yields a negative 10% return rate on investment. In other words, you would have been better off taking the money you earned, but confiscated by the government to sustain Social Security benefits for retired Americans, and put it under your mattress. If you had a broker getting negative 10% returns on your investment, you would fire them. Negative 10% return, confiscated wages, and this is the program that Nancy Pelosi does not want to change one bit.
Just like most other political class and government run programs, this one is a money loser and a freedom depriver. While this program may have made sense long ago when people did not live as long and the base of contributors to the program far outnumbered the ones receiving the benefit, that situation is long gone. People like Pelosi either do not want to recognize the changing reality or are not competent enough to understand it, but the program today is nothing more than a con job of those too young to retire.
– If you do not believe these two economists, consider an analysis I did on my own Social Security situation that looks at this financial fiasco from a long term, year-over-year investment perspective. I recently received my latest individual numbers from the Social Security Administration and updated my analysis spread sheet. The main assumptions and calculations in this spreadsheet include the following:
1) I calculated all of the money, year-by-year, that my employers and myself had contributed into the Social Security pool.
2) I assumed that I would have been able to keep that money but had to invest it in a tax free IRA or 401k account immediately.
3) I then located the historical annual S&P stock market investment returns and assumed that I put all of the Social Security money into a low cost S&P stock fund.
4) I grew, or shrank, my pool of money every year based on the S&P rate of return.
5) Starting this year, I assumed that I would get more conservative with my investment strategy since I am approaching retirement (I am 57), a standard investment tactic. Thus, I assumed that I could get a 4% return with this more conservative investment approach and that I would stay at this 4% conservative approach for the rest of my life.
6) Social Security tells me that age 62 I can start receiving monthly Social Security payments of $1,592. This becomes my bench mark.
How much better or worse would this approach have been vs. what Pelosi wants to keep unchanged? Consider the following spreadsheet results:
* Under the above assumptions, starting when I was 62 years old, I could take out twice as much than what Social Security will pay me and not run out of money until I was 88 years old. At that point, if I was still alive, I could live off of other investments and savings.
* Under the above assumptions, starting when I was 62 years old, I could take out 75% more than what Social Security will pay me and not run out of money until I was 95 years old. At that point, if I was still alive, I could live off of other investments and savings.
* Under the above assumptions, if I wanted to be conservative, I could take out 50% more than what Social Security will pay me and not run out of money until I was 100 years old, at which point I would still have a $267,000 in my account.
Thus, a different approach from the Urban Institute but the same result: I am far better off investing my own money using standard investment knowledge than letting the political class dictate and control my retirement money and life style.
Another positive aspect of this theoretical approach is that I would have had the wealth and money under my control. I would not be subject to the whims and ignorance of the political class and subject to their control. Its called freedom and the con job of Social Security does rob us of some of our financial freedom.
– Don’t believe the stock market is a sound way to save for retirement? I took a much more conservative approach to find out if and when Social Security ever becomes a better deal. Using the same model above, I changed my long term investment approach so that it was not invested in an S&P stock fund but it was invested in long term U.S. T-Bills. I went to a government website to locate the historical annual returns of long term T-Bills. This is theoretically a safer, more conservative investment approach. What did I find out:
* Under the above assumptions, I could take $1592 out of the account each month, the same amount as what Social Security will pay me, and at age 100, still have $50,000 in the account.
* Under the above assumptions, I could take out 20% more than the $1592, and enjoy a 20% better life style, and not run out of money until age 92, if I lived that long.
In either approach, I and probably tens of millions of other Baby Boomers would have been better off if the government had allowed us to take care of our own retirement. They did not and now we are in a quandary, with unwilling or unable leadership to solve a problem that might sink the nation. And unless major changes are made, this con job will continue for generations of Americans to come.
Three simple short term steps could clear up the crisis:
* Raise the retirement age to 70 with a provision for less wealthy and less fortunate Americans to draw full Social Security payments prior to that age if they need it. In 1950, there were sixteen workers for every retired, Social Security eligible person in the country. By 2030, that ratio will be down to two to one. It is unfair to burden the next generation of younger Americans with this burden for older Americans that do not need Social Security before reaching the age of 70. (Source of data: Time magazine article, March 20, 1995.)
* Prohibit any American with assets, not income, of over $3 million to not draw any Social Security payments until their asset level is below $3 million. A $3 million asset base, invested to give off a modest 5% return a year, would generate annual income of $150,000 a year without depleting the principle. $150,000 would put that American in the upper 5% of earners in the country, anyone should be able to live comfortable on $150,000 in retirement. This action would make the system more solvent and create a higher chance that the truly needy Americans would still get Social Security support in the future.
* Reduce the Social Security tax rate but uncap the earnings cap so that all income, wages, interest, dividends, etc., are taxed at the lower rate. An American who makes about $100,000 a year pays about the same amount of Social Security tax of someone who makes $10 million a year. This second person makes one hundred times as much in a year but pays the same amount of taxes. This inequity needs to be changed and made fairer.
Longer term, once the above three steps help stabilize and correct the short term disaster that the political class has created, the longer term strategy needs to be the dismemberment of the entire Social Security program and the return of Americans’ wealth and freedom to those Americans. Never again should we allow the politicians in this country to hoist a con job on us like the current Social Security program, a scam that reduces our freedom, reduces the life styles we can and should be able to afford in retirement, and allows the political class to control the end of our lives.
It’s called individual responsibility and politicians hate it when we control our own destiny. It deprives them of one less way to divide the country for their own political advancement, no matter what the cost to our pocketbooks.