When We Could Afford the Welfare Scheme of Social Security
Every generation scolds the next one down the line and blames society’s ills on the guy up at bat. Considering past policy decisions, this common perspective doesn’t make much sense. Just look at the Great Depression generation, both known for its great character as well as the worst policies of the century. Clearly, older generations did not always make the best decisions.
One of those bad decisions, Social Security, still haunts America today like the grim reaper waiting to take his harvest. It’s strange to think the same men who courageously stormed the beaches of Normandy didn’t have the political courage to dismantle this ticking time bomb. If it wasn’t for WWII veterans, many believe that this article would be written in German. That might be true. But due to an exploding national debt and that generation’s failure with Social Security, we’ll be speaking Chinese sooner than German.
The lack of political will isn’t surprising since most past retirees were net gainers from Social Security while new retirees are net losers. Older folks love bemoaning runaway spending, welfare queens, and handouts. But often they don’t consider their own gains from the welfare state.
As Social Security taxes increased over time, so did the benefits. Essentially, previous generations paid into the system when taxes were low and retired when the benefits were high. A retiree’s maximum tax loss from Social Security in 1940 was $923 in today’s dollars. Compare this to the current maximum of $13,243.
To find the dividing line between net gainers and losers, we created a projection assuming an individual with a salary equaling the top taxable Social Security limit for 45 years (to get an idea of this amount, consider the limit was $3,000 dollars in 1940 and $106,800 in 2010 – both nice salaries). Our test dummy paid the maximum Social Security taxes every year.
On the other hand, upon retirement, he would receive maximum benefits. According to the Social Security Administration, maximum taxation is a prerequisite to maximum payouts. Next, we added Social Security benefits received over 13 years (derived from the average U.S. life expectancy of about 78). Finally, we calculated the difference between taxes paid over 45 years and the payouts received for 13. The results were shocking.
Before 2007, our projected retirees were net gainers from Social Security. 2007 retirees were the first net losers at -$411. By 2011, retirees will be -$40,403 in the red.
In the ‘80s, a Greatest Generation survivor retiring at 66 in 1985 received a net gain over his expected lifespan of $113,350 in 2010 dollars. Just a decade down the road, a 1995 retiree still profited by $67,982.
While welfare is often equated with public housing residents, perhaps nursing home residents should be considered too. These Social Security payments outweigh many welfare handouts. For example, California’s maximum TANF (welfare) payments for a family of three were $9,373 a year in 2005, inflation-adjusted for today. It takes over 12 years of welfare to equal the 1985 retirement net gain. (To be fair, if housing subsidies, food stamps, and other benefits were included, the number of years would be lower.)
So, are pre-2007 retired generations complete bums? Well, not exactly. It depends on how the money would have been spent otherwise. Suppose that instead of paying Social Security, the same amounts had been placed into an account earning five percent a year.
After 45 years starting in 1940 and ending in 1984, this account would have been worth over $297,000 in 2010 dollars. This is $44,000 more than 13 years of Social Security benefits starting in 1985.
Hence, older retirees are bums on a case-by-case basis. An investment-savvy penny-pincher would have lost from Social Security. Without the program, he could have invested privately. But spendthrift retirees benefitted enormously. The responsible saver is punished and the careless spender rewarded – the same old story of welfare retold for an older generation.
How Much Do You Really Pay for Social Security?
The government has pulled a fast one on most people. You pay half the Social Security tax and your employer pays the second half, right? No, wrong. You actually pay both.
Let’s go through this example to understand the point. Let’s say that a person earns $100,000 a year and pays $6,000 in Social Security taxes and the employer pays $6,000. In the eyes of the employer, the person’s services are worth $106,000 ($100,000 salary + $6,000 in Social Security taxes), that’s how much he costs the employer.
Now, imagine what would happen if Social Security taxes disappeared overnight. For a little while, the employer would profit by paying $100,000 for an employee worth $106,000. However, in a free market, prices move toward levels equaling the underlining value. Just like good underpriced stocks will eventually move up, so does the price for good undervalued employees – although, both may not be immediately appreciated.
Eventually, the person’s wages would be bid up in the market from $100,000 to $106,000. Because of this, the employer’s half is actually your half too. Without Social Security, your wages would be close to your value to the employer, in this case, $106,000. So, in reality, the person pays $6,000 in taxes and makes $6,000 less than he would in a completely free market, meaning that the real loss is $12,000 per year.
Regards,
Vedran Vuk
Whiskey & Gunpowder
April 8, 2010
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I did this analysis for my own SS account assuming that, instead of Ponzi finance, it was a forced savings program that bought long term treasuries for my own account . Using a 3% p.a. return throughout, the result was similar to yours –I would have had just under $300,000 when I retired. At that time I could have then invested conservatively for a return of about $18,000 p.a., which is approximately what Social Security is.
The difference is that, under a forced savings plan, I would still own the investment account, so, don’t tell me that I’m pulling out more than I put in.
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” It’s strange to think the same men who courageously stormed the beaches of Normandy didn’t have the political courage to dismantle this ticking time bomb.”
Most didn’t know any better. No real understanding that it was a Ponzi scheme. It wasn’t at all a matter of toughness or courage.
Look: Many very rational and intellignet people in the 1930s worried that indeed, capitalism had failed. Some sort of old age safety net was needed. There was little or no money for the hitherto county-paid “old folks home” and many families had difficulty in merely feeding aging relatives. Think “desperation”.
It wasn’t all that difficult for FDR to sell his bill of goods in the name of compassion.
Time goes on, the costs weren’t all that onerous to working folks, and then SS gained its constituency. Meaningful change? Remember how hard it was to defeat the constituency of the 55 mph speed limit?
I agree with much of what you say but SS is not a Welfare Scheme
Get a statement from SS and look at what you and your employers have put in over the years. It comes to a substantial amount over just 20 years never mind 40…………substantial
Well, Andy, IMO it started out as one thing and quickly morphed into quite something else. I recall oldsters in my youth getting their SS checks and eagerly awaited them. Many elderly women when I was a child were receiving their own personal SS checks in the mail every month – and they had never done an hour’s work (FOR PAY, mind you) although they busted-their-fannies doing the women’s work that “is-never-done”. At that time I didn’t give it much thought. Flash forward some year, and an older woman friend, married to a rich oil man, began to draw HER SS check and initially she crowed over it. Wow, never held a paying job in her life, and her she was, getting a check every month, nice ‘walkin’ around’ money to do with as she desired. In ensuing years – I saw other women (older than I) having the same sudden claim-to-fame and a monthly check from an account into which they had not paid. Reactions? The first few months – wow, they got and cashed those checks and it was like Christmas From the Govt every first week of the new month. They soon got accustomed to it – and I saw the ugly ENTITLEMENT rear its head. Let the SS be a day or two late – and suddenly things had changed. The gift from the govt was no longer a sugar plum dropped into their waiting mouths. Nope, it was an ENTITLEMENT, theirs, by gawd, and if it was late they were on the telephone calling up the USPS to rage and crank and wonder WHO had been up to no-good with their check. Sad, but true. I saw this Welfare Attitude Morphed Into by the self-same people who in the not-that recent past SCORNED those who were on “relief” later called Public Aid/Welfare, Etc. So SS soon became like one of those ‘chain letters’ where you put five bucks in an envelope and send to the person at the top of the list, writing your own name at the bottom, and wait and watch the mailbox figuring that $5 invested to send to another is gonna make ya rich, rich, rich! IF the money had been put in an account and STAYED there and not “compassionately” given to every Tom, Dick, Harry and Jose we wouldn’t have the problems we do. Paying into SS is a lot like playin’ the slots in Vegas at this point, for most who are paying in, it’s a case of throwing good money after bad. Chalk it up as a “cost of doing business”, LOL. The way they shift the draw-dates around it’s very much like holding a carrot tied to a string tied to a stick, held out just ahead of the horse’s nose to convince the horse to amble forward intent on one day catching the prize. And what’ll the prize BE? For most of us…bales of hay for believin’ and being jackasses!
In a marketplace without SS, you would not be keeping the entire amount of what is paid in your name. You would only keep that part that you are paying in. If we did away with SS everyone would not suddenly get the amount that the company pays in your name. The company would keep it and the cost of busness would go down.
What a trap America has got itself into. This SS is a major motion into socialism, taking responsibilities away from the people. Once these socialist ways start rolling they just start to build. People come to rely upon what the government has promised and to go back immediately would cause mayhem. The only way out of this is going to be to slowly take away the amount people receive from each SS check till they are no more.
What scares me right now is that the government is looking toward its expansion with Health care and bailouts. This doesn’t seem the issue that it should be to them. The government seems to power hungry and they don’t want to lose the power SS gives them. No politician wants to take the fall in votes that addressing the SS issue will cause.
Look at what it suffering instead. The government hasn’t been looking at SS when doing budget cuts but at education and other area’s that are essential. Seems this nation is loosing a lot of its roots.