Ever Wondered Just How Bad You’re Getting Screwed by Social Security?

| August 19, 2012

As I’ve previously noted, most folks approaching retirement age probably have already figured out that they’re gonna get screwed by Social Security – e.g., that they will get less value back in benefits than they paid in in taxes.  But that’s only part of the issue.

You’re also not going to own a damn thing.  Your benefits are completely dependent on the whims of Congress; there is no contractual relationship between you and Social Security.  If Congress decides to cut your benefits in half because of future financial difficulties, well, sorry.  That’s life, and you’ll have absolutely no legal recourse other than to vote for a different Congressman.  And that  may not make any difference.

However, spreadsheets and the Internet are wonderful things.  I’ve developed a calculator that lets you see precisely what Social Security has cost you compared to a private retirement plan; you can download it here if you like.  So now you can see – if you’re so inclined – just how badly you’re getting screwed by Social Security.

This calculator allows you to input your income history.  It then assumes that the employee and employer contributions for OASDI  – the Old Age Survivors and Disability “Insurance” part of Social Security taxes –  are each then invested in an actual retirement account owned by the recipient, with returns based on the DJIA.  (And no, insipid – the fact that the Social Security Administration and other elements of the Federal government continue to lie through their teeth and call it “insurance” doesn’t alter reality.  Social Security is not and never has been insurance.  There’s no contract, no policy, no premiums.  Those OASDI deductions from your paycheck  are taxes, not premiums; Social Security is a PAYGO income-transfer program and is not any form of retirement savings program or insurance policy.)

The Alternative We Didn’t Adopt

Now, let’s assume Social Security had been converted in, say, 1965, into something like a “Super-Hybrid IRA with employer matching”, but with the earliest age one could begin making withdrawals set at age 62.  Under this scenario, there would be the obvious benefit for our children and grandchildren of not saddling them with a huge economic “Sword of Damocles” hanging over them regarding actually paying  future Social Security recipients’ benefits from current tax receipts.  (Remember:  today’s Social Security is PAYGO.  And the only collateral backing the system are Federal government IOUs from one government agency to another.)

The investment vehicle for these contributions is a hypothetical “DJIA Mutual Fund” that precisely tracks the DJIA – e.g., the fund consists of the stocks in the DJIA at proportions owned such that one share in the hypothetical fund costs exactly the DJIA.  Investments are presumed to occur on the last business day of the month, without load, and to consist of 1/12 of annual earnings.  (In actuality, they’d probably occur a couple of days later and consist of the previous months’ contributions, but I approximated due to data availability for DJIA aligned on end-of-month and the fact that I didn’t want to deal with different amounts of earnings each month based on slightly more/fewer days in a given month.)  At age 62, the owner would be allowed access to these funds, like any other retirement fund.   He/she would in fact own them – lock, stock, and barrel.  If he/she died early, his spouse/heirs would inherit them.

Since at least the employee contributions would be post-tax earnings going into the investment account, under Roth rules at least half of the withdrawals made from such a fund would be tax-free.  If employers were allowed to deduct the cost of such contributions as a mandatory employee benefit expense, the other half would be taxable.  That’s arguably still better than today’s Social Security, where up to 85% of Social Security benefits are subject to federal income taxes.

The Model

The spreadsheet model consists of 4 pages.  The first page allows you to input annual wage data for any year between 1960 and 2029.   It also contains other historical data of interest – minimum wage info for each year, the Social Security wage base, and the OASDI tax rates in effect for both employers and employees, and a hypothetical “midpoint” earnings case (e.g., an individual earning exactly halfway between minimum wage and the Social Security wage base each year).   The second page contains end-of-month DJIA data for all years from 1960 to July 2012 – there are multiple sources of such freely available on the Internet – and uses a placeholder value for future months.  (This placeholder value will obviously need to be updated each month in the future to reflect actual end-of-month DJIA figures.)  The third page gives calculations for each month in terms of amount invested, DJIA “shares” purchased, and an individual’s net account holdings and value based on the DJIA at that point in time.  A fourth page calculates retirement payments from this account based on a rate of return, an assumed monthly payment, and starting balance.  The payments are increased by the rate of return each year to at least partially account for inflation, and are (like federal retirement payments) truncated to the nearest dollar. Format is MicroSoft Excel 2003, so you’ll need software that can use this format in order to use the spreadsheet.

To use the spreadsheet, enter your career earnings on the first page.  You can also include future estimated earnings if you like, but since you don’t know what the DJIA will be you’ll be “flying blind” there regarding future holdings and values.  (The placeholder I used for future DJIA is 1, so any info after July 2012 is grossly inaccurate – but that also does clearly show you when you’re projecting into the future on the Balances page.)  Then assume an investment rate and monthly payment and enter it, along with the account worth, into the appropriate blocks on the Retirement Payments page.  Like Social Security, the retirement payments calculator assumes a 1-month lag (beginning of next month vice month of retirement) for beginning of payments.  This calculator also implicitly assumes you’ve “cashed out” into a fixed-value, income-producing  investment like Treasuries or Municipal Bonds and will be drawing from that source.  The month in which the EOM balance goes negative is when you run out of money.

Effects

So, how would this stack up with today’s Social Security?  What would be the effect on individual recipients?

AARP has a Social Security Benefits Calculator.  (The SSA does too, but unlike previous versions their current calculator/estimator doesn’t seem to allow entry of hypothetical incomes – it now seems strictly tied to one’s individual earnings record at SSA.  So while it’s more accurate in estimating your personal Social Security benefits, it’s rather worthless for general estimation and comparisons.)  Using that AARP calculator, I ran three scenarios:

  1. A career full-time minimum-wage worker;
  2. A career “midpoint” worker (e.g., halfway between minimum wage and the Social Security wage base)
  3. Someone earning the full Social Security wage base throughout their career.

Two big caveats here:  first, the AARP calculator asks for an “average salary’.  I’m assuming that the AARP calculator is asking for that average salary in current-year dollars and converts this to equivalent salaries for prior years properly.  Otherwise, AARPs estimates could be high.  Second, I’m also assuming that it recognizes minimum wage as exactly that – minimum wage.  Otherwise, since minimum wage has risen dramatically over the last six  years the estimates calculated by the AARP calculator will be substantially higher than actual for the minimum wage case.

I assumed this hypothetical individual was born on 1 Jan 1951, started employment in Jan 1968, and will retire at age 62.  Here’s what AARP’s calculator gave for benefits under those scenarios.

  1. Career Min Wage Worker, Age 62:  $656/mo
  2. Career Midpoint Worker, Age 62:  $1548/mo
  3. Career Wage-Base Earner, Age 62:  $1953/mo

So, how would those folks fare under a privatized scenario as described above?  Well, let’s “run the numbers” and see.  And since not too many people are career minimum-wage earners or stay exactly at one relative earnings point for their whole career, let’s look at how a more typical career pattern would look too.  Specifically, we’ll look at someone who (1) works for a few years at minimum wage, then (2) gets into a professional career field, starting at the entry-level, then (3) gets periodic promotions, and who (4) ends up earning around $90k a year for their last 3 years (ages 60/61/62).  (Income totals corresponding to this hypothetical scenario starting in 1968 and ending in 2012 are loaded into the version of the spreadsheet available for download.)  All are assumed to retire at age 62; the net worth shown below for each are as of July 2012.

Net Worth, Privatized Retirement Scenario

  1. Career Min Wage Worker:  $204, 646
  2. Career Midpoint Worker:  $606,585
  3. Career Wage-Base Earner:  $1,008,524
  4. Typical Professional Career:  $555,011

No, that first value is not a misprint.  Under the privatized option I presented above, a career minimum wage earner would have had a retirement account worth nearly $205,000 as of 31 July 2012. While he or she might be somewhat better off under Social Security, given life expectancies that’s also not a slam-dunk; if Social Security ends up paying less in a few years, he/she would be better off under the privatized scenario.  And in any case:  at 2.5% return, the guy/gal could draw benefits, starting at $656/mo and upped by 2.5% annually, for between 27 and 28 years – or until he/she were close to 90 years old.

A career midpoint worker would end up with the ability to draw benefits from his/her account starting at the same monthly amount provided by Social Security for roughly 34.5 years under those same conditions – or until roughly age 96 1/2.

Wage base earners?  44+ years of benefits starting at the same dollar figure provided by Social Security – or until age 106.

Oh, and that “typical professional career”?  31 1/2  years of benefits at approx $1450 per month, increased by 2.5% each year.  Or until age 93 1/2.

Further: under this scenario, you could opt to take smaller monthly payments to extend the period if you were seriously worried about outliving your money.  Any money left at the owner’s death would go to spouse or heirs.  And there’s also no reduction for spousal benefits above, either.  In fact, if the spouse had his/her own account, you’d add benefits for that to the above totals.

 

Now, can someone tell me again why the Social Security we have today is such a “good deal”?

Category: Politics, Reality Check

23 Comments
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Mike Kozlowski

…All anyone has to do is remember the day that some DOD functionary very quietly said to a Congressional briefing, “Nobody ever promised lifetime health care, etc., to retired veterans.” They did it to us, they’ll do it to you.

Mike

CI

“Ever Wondered Just How Bad You’re Getting Screwed by Social Security?”

I try not to think about it. It’s plainly depressing when you realize that the money the government is stealing from you with the stated intention of giving you a paltry stipend [should you live long enough to redeem any of what you paid in], has little to no chance of ever finding it’s way back to you again.

Destro

simple solution, return it to the insurance program it once was…you can’t collect until you reach the avg. life expectancy (78?). It was never supposed to be a retirement plan, it was for people who outlived their retirement.

Destro

I was never promised lifetime health care if I retired from the military

NHSparky

Fuck that Destro…what you proposed is an involuntary bet between you and the government. What if I choose not to take that bet?

Anonymous

So a bunch of anti-government conservatives whining that they won’t get military benefits that were never in their contracts anyway? Who would have thought?

Destro

I didn’t propose anything…it is what it is, if you don’t pay in, and if you run out of retirement money…have a nice life, you should get zilch

Jeffrey Jones

Now 46, I am fortunate to have an Army Reserve retirement at age 60; a partial state retirement at 60; and Social Security at 62. Just wondering how much actual money I will see …

$20 MIKE

#6 woulda elaborated,BUT…it was 4:20,RITE???

defendUSA

Once again, Destro…SS is NOT and never was “insurance”. As for what I’ll see?
Unfortunately, I didn’t have big picture vision and I stayed at home raising my family for 17 years. I don’t have enough of anything to collect SS except my spouse’s– if he dies before me. Just keep swimming…just keep swimming.

NHSparky

Actually, anon…it IS in our “contracts” or in this case, the various service and DoD regs, federal law, etc.

Now pretty please GDIAF.

NHSparky

Destro…under the current “system” if you don’t pay in, nice men from the IRS come and introduce you to Bubba at a federal pound-me-in-ass prison near you. At that point money you may or may not get from SS will be relatively low on your list of concerns.

And please show me how much money is in “your” SS account.

insipid

I’m begging you STOP making the “it’s not insurance because there’s no contract/premium argument.” Government services work on a social compact, not as an individual contract. I don’t have a contract with a snow-plow company to plow the streets but i can still get to work on a winter’s day. You cannot compare social security with an investment portfolio because they are two different things. Social Security is insurance. It is there should some private equity firm such as Bain raid your pension. It is there should you invest in something that is “completely safe” like mortgage backed securities, only to see your entire life savings disapear. Social Security, unlike pension plans or investment portfolios cannot go under. While portfolios have been built and crashed and pensions have been raided over the last 77 years, SS has not missed a single payment. Congress cannot get rid of or cut payments to SS on a “whim”. They have to get about 280 members to agree to it (this is generously assuming that there is no fillibuster and that the President does not veto the legislation). Contrast this with insurance companies and investment companies that may not pay because of bankruptcy or crooked dealing. But I can vote out my member of Congress (assuming that the Republicans don’t figute out a way of stopping me) i can’t do shit to the board of directors at a company. Congress can’t do anything- short of naming post offices- on a “whim”. Your understanding of… Read more »

insipid

@6- Destro- It is amazing to me that they will whine about military benefits being cut with the correct argument that “they paid into them” but have no problem cutting benefits from 10s of millions of people who also paid into them.

I’m of the belief that they’re just sadists. That they love guns, not for protection but because they kill people. That’s why they love “stand your ground” laws so much. That way they can kill someone and not even have to stand trial for it. They love the Military not because it keeps us safe but because it can kill on a grand scale.

They hate Social Security and Medicare not because they don’t work, but because they do. CI is “depressed” because they money they are “stealing” is keeping the elderly and their from being devestated from a single illness or keeping someone whose investment didn’t quite pan out from living in the street at 72. How utterly inconvenient for him.

It’s a philosophy that has turned selfishness into a virtue, Gordon Gecko’s famous dictate into a positive.

I only wish they can go to a place without a social safety net, without any gun laws or government intrusion. One way trip to Somalia for all of them, where they can be “free”.

contin

This is the first time I have posted a response to this website. Unfortunately I can not keep quit anymore. @Insipid – First we “conservatives” complain about Social Security and Medicare not because they don’t work, we complain because they are not sustainable in their current setup. They will go bankrupt at some point in the future and unless an overhaul is made, us taxpayers will have to cover much more than what we already do. President Obama’s health care law stripped out over $700m from Medicare but claims he improved it. We love our guns not because they kill people but we love them for two simple reason. 1st, they are a form of protection. I CCW at all times because I have a wife, a son and property that I have bought and paid for. I sleep with a weapon within reach for the simple point of “what if”? I would be happy as hell if I never have to use my CCW once in my life. While it does have the power tø kill, it would never be used on anyone without provocation and the endangerment of myself, my wife or my son. You take away legal guns and all you have left is armed criminals who don’t care about the law. 2nd, it is a symbol of personal freedom and responsibility. Our government gave us the “right” to bear arms as promised in our constitution. Take that away and you remove the foundation of what this… Read more »

insipid

I am a veteran too. And there are a great many people on this very site that will argue that there should be no restrictions whatsoever on gun ownership other than what you can afford. There’s even one guy who makes the Tim McVeigh’s anti-government argument (and Hondo STILL has not condemned him!).

The military also requires government funds to sustain. We sustain them because we as a society made that a priority. There are ways to sustain both programs without ending them. President Obama has already extended the life of Medicare by almost a decade with the affordable care act. Most of the extension was done without costing the taxpayers anything- by stopping overpayments to private insurance companies etc.

When you advocate getting rid of Social Security and Medicare you’re advocating throwing millions of seniors into povery and putting them at the mercy of private insurance companies. And the reason why you want to do this is because you’d rather they starve and be destitute then make ANY changes that may effect the wealthiest. I’m sorry, but these people have been paying into these programs for decades, the same way members of the military have paid in. Taking them away because it may cause an inconvenience is pure sadism.

insipid

Just so you know, Contin. None of the 716 billion “taken out” of Medicare has to do with benefits. The PPACA has actually increased benefits to seniors by giving free wellness visits, closing the donut hole and providing 0 copays for preventive care.

Here’s a good article stating where the savings are coming from:

http://www.washingtonpost.com/blogs/ezra-klein/wp/2012/08/14/romneys-right-obamacare-cuts-medicare-by-716-billion-heres-how/

There are no cuts to benefits. In fact repealing “Obamacare” makes it insolvent 8 years earlier because of a loss of these savings.

contin

Where did I say to take them away? I never said to take away Social Security and Medicare. What Romney/Ryan want to do with Medicare is to change the way that Medicare works. Instead of the Government paying a provider directly, the pay money to the senior and allow them to choose their own private insurance. Getting the government out of what can and can’t be covered for payment is a win/win. Private insurance is not the big evil you make it out to be. I personally see nothing wrong with this. I currently receive all of my primary care through the VA. Even though all my medical is 100% covered through the VA, there are huge problems with the fundamental way they are allowed to provide medical care. There are numerous medications that, although FDA approved, are not approved to be dispensed through the VA Pharmacy. There are numerous procedures not offered through the VA. There is no choice and no freedom with which doctors and specialists that you see in the VA system. Why am I bringing up the VA? Simple, there is a belief by numerous lawmakers that this is how standardized health care systems should work. If the VA came to me and told me I could either utilized the free health care through them or take a monthly allowance to take private insurance, I would gladly take the insurance. With the insurance I have options. With medicare, you are only allowed to go to government… Read more »

defendUSA

Insipid– Here are some direct quotes, from the SS pamphlet, and court cases which spell out, via the courts, that SS WAS NOT AN INSURANCE PROGRAM!!! Perhaps, we have been willfully obtuse in that you use the word “insurance” to really mean “assurance” that people who paid in would get something back. Put on your thinking cap–The caps are my emphasis. The Social Security pamphlet of 1936 read, “Beginning November 24, 1936, the United States Government will set up a Social Security account for you. … “THE CHECKS WILL COME TO YOU AS A RIGHT.” (http://www.ssa.gov/history/ssb36.html). Americans were led to believe that Social Security was like a retirement account and that money placed in it was, in fact, THEIR PROPERTY. Shortly after the Social Security Act’s passage, it was challenged in the U.S. Supreme Court, in Helvering v. Davis (1937). THE COURT HELD that Social Security WAS NOT AN INSURANCE PROGRAM saying, “The proceeds of both employee and employer taxes are to be paid into the Treasury like any other internal revenue generally, and are not earmarked in any way.” DO YOU UNDERSTAND? THERE IT IS IN BLACK AND WHITE!! Below are some tidbits from Chuck Z which you should also read and comprehend… Franklin Roosevelt, (Six worst letters in American History are FDR and TVA) a Democrat, introduced the Social Security (FICA) Program. He promised: 1.) That participation in the Program would be completely voluntary, (No longer Voluntary) 2.) That the participants would only have to pay 1% of… Read more »

NHSparky

And remember, that doesn’t include your federal witholding, state taxes, property taxes, vehicle taxes, etc.

Even in NH, a state with no broad-based income or sales tax, I figure over 40 percent of my income goes to some level of government somewhere.

And to think that the Founding Fathers were blowing the heads off Brit troops over a tax rate far, far lower than that.