Why Social Security Sucks
October 5th, 2009 Filed under: Uncategorized — Economic Author
Ok, the average American makes about 45k a year. Uncle Sam forces you to pay 6.2% of your income to Fica, aka Social Security (SS). Uncle Sam also forces your employer to match that 6.2%, also contributing it to Fica on your behalf. Thus, 12.4% of your income is contributed to social security. Assuming you are the average American making 45k per year, you contribute roughly $100 into the social security system each week. That’s a lot of dough.
Assuming you work from age 22 to age 62 (40 years of service) and never get a raise, you have contributed $192,000 towards the government’s mandatory retirement plan. Then you retire at age 62 and live to be 77.8 years old, all the while drawing about 30k a year from SS.
However, while you are retired, you will probably have to liquidate most of your assets for living & healthcare costs, because 30k per year isn’t much money. When you die, social security stops and your withdraws have totaled approximately $480,000. That calculates out to be a 4% return on the money you have contributed to SS. At the time of your death, whatever assets you have will be held against your debts, and whatever remains is passed on to your heirs.
Now, let’s pretend for a moment that the government did not force you to participate in SS. Instead, you contributed the same money into mutual funds via Roth IRAs & 401(k)s. You invest the money, gaining a 12% annual return (the average of the US Stock Market since its inception), over the same 40 year time period.
At age 62, you will have invested the same $192,000 into retirement, however instead of $480,000 in retirement funds, you would have 10 times that – over $4.7 million! Thank you compounding interest. Now you retire at age 62, live off of 5% of your investment ($230,000 per year!!!), and your nest egg remains untouched. Thus, you die leaving your heirs with $5 million buck in inheritance.
To summarize:
* Social Security: contribute $192,000 @ 4% = $480,000 / 30k per year at retirement / $0 left at death.
* Private Retirement: contribute $192,000 @ 12% = $4,752,000 / $230k per year at retirement / $5 million left at death.
That is why Social Security Sucks.
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3 Responses to “Why Social Security Sucks”
By Glen Andrews on Oct 5, 2009 | Reply
If more people understood how the “system” works there would be a lot more sleepless nights for some folks.
I love your article, and it’s right on target. More people should pay attention to this blog so that they cannot claim ignorance.
I also like your writing style, straight forward, and personal.
By Pop on Oct 7, 2009 | Reply
Hi Stacey,
Let’s not dwell too closely on pre-tax or post-tax rates of return; allow me to draw your attention to something altogether larger.
“At nearly $86 trillion, Medicare’s unfunded liability [ http://www.ncpa.org/pub/ba616 ] is almost six times the size of Social Security’s. Unfortunately, there’s no easy way out. If we were to end Medicare tomorrow [ http://www.ncpa.org/pub/st317/ ], collecting no more payroll taxes and allowing no more benefit accruals, we would still need $32 trillion in the bank right now to pay for the benefits people have already earned!” (Source, John Goodman of the National Center for Policy Analysis)
According to the 5/13/09 New York Times, “The Medicare hospital insurance trust fund may be depleted by 2017 and Social Security reserves gone by 2037, a new report from trustees says.”
Commenting on this, Stephen Moses of the Center for LTC Reform added the following, “Well, right, but that ain’t the half of it my friend. Hello! There is nothing in the trust funds–nothing in Social Security’s and nothing in Medicare’s–except for IOUs. The government has already borrowed and spent all the money collected to help pay for boomers’ retirement.
To make good on those “trust funds”–they don’t deserve going without quotation marks–Uncle will have to do one of three things: tax, borrow or print money. I call it TBP. None of the three will work; all of the three will make matters worse.
Tax more and you’ll impede the private economy’s ability to produce profits to tax in the first place. That’s an economic whirlpool.
Borrow and interest rates will increase, lenders like China will retreat, and carrying costs on the debt will consume more and more of what you’ve borrowed. That’s a dead end.
Print money and inflation will grow taking back any value ostensibly created. Inflation is the worst tax of all.
What matters is not when the “trust funds” will run out, but when receipts will lag spending for Social Security and Medicare. That’s when government will have to use T, B, or P to cover all those IOUs.
And, guess what? Medicare is running negative cash flow this year! Social Security goes negative in 2016, just seven years from now!”
To put this all in perspective for your readers, funding for Social Security, Medicare, and Medicaid consumers around 2/5ths of our Federal Budget, and it’s on an unsustainable path. By 2030, the projections are bleak:
o To keep federal spending stable as a share of the economy would mean eliminating all defense spending and most other domestic programs (for research, homeland security, the environment, etc.).
o To balance the budget with existing programs at their present economic shares would require, depending on assumptions, tax increases of 30 percent to 50 percent — or budget deficits could quadruple
It’s not that Social Security sucks per se; it’s that the warning signs for our entitlements have been visible for decades, yet these 3 programs have been politically untouchable by either party…they are the cans that are perennially kicked down the road.
–Pop
By Charlene Davis on Oct 10, 2009 | Reply
Wow, this was certainly an eye-opener. I appreciate the way you broke it all down. And you’re right – SS does suck.