Friday, October 19, 2012

Social Security Rates of Return

The latest data from the Social Security Administration is interesting, but leaves me with more questions than answers.

I have tried, in the past, to calculate the rate of return on Social Security.   Based on what I have contributed, I calculated about a 4% rate of return, which is not too bad for a "guaranteed" safe investment.  Of course, it is not so "safe" when Politicians promise to cut it off, for those under age 55.   I am 53.

Others have argued that those in the higher income brackets (the max is $108,000 right now, above that, you don't pay any Social Security tax) will get back less than they paid in.

Apparently, this is not entirely true, according to a new study from the Social Security Administration:

  • Younger workers will get less. Today's young people will see lower rates of return, because they will have paid the highest payroll tax rates of all the age groups compared in the SSA analysis.
  • Couples do better. Marital status is a key factor affecting Social Security returns. In every age group, the best returns went to married couples where one spouse works. That is because Social Security's design includes valuable spousal features that pay benefits to nonworking spouses and surviving widows. Spouses are entitled to receive the greater of his/her own benefit or half of their spouse's benefit. And surviving widows can step up to 100 percent of a deceased spouse's benefit. A single-earning couple with medium wages, born in 1943, will see a 4.59 rate of annual return, while a single female born the same year - also with medium wages - can expect a 2.49 percent return. (Spousal benefits are also available in cases where a lower-earning spouse had some earnings but so much less that their worker benefit is less than half.)
  • Longevity matters. All pension and annuity systems are structured around mortality credits - that is, they use assets of those who die young to fund the benefits of those who live to a very advanced age. A projection by Favreault of Social Security data found that 82 percent of individuals who live to age 85 get back more in benefits than then pay in taxes; about 52 percent of those who die between 75 and 84 come out ahead. Meanwhile, just 21 percent of those who die between 62 and 69 get back more than they put in to the system. The odds here are especially good for women, since they have a higher likelihood of surviving to retirement age and longer lives after retirement. That gives them higher rates of Social Security return - a medium-earning single female born in 1943 can expect a 2.49 rate of return compared with 2.09 percent for her male counterpart. 
  • Lower-income workers come out ahead. Low-income workers enjoy higher rates of return by design, because Social Security's benefit formula is weighted toward lower-earning beneficiaries and their payroll tax contributions will be relatively lower. A very low-income couple born in 1943 will receive a 6.79 percent annual return, compared with 3.92 percent for their high-earning counterparts.

Of course, this is data from the agency itself, which of course, does not have any agenda or dog in this fight.

The other problem I have with this analysis it that it is not clear to me whether it includes the amount contributed by your employer.  You see, when they take out that money for Social Security and Medicare, your employer matches it.   And when you are self-employed, you have to pay both sides of this deal, which works out, in some years to an 18% tax on your income.

That's a lot of dough.   (And that is one reason why I bought my own Office Building when I had my law practice.  You see, by paying the mortgage on that office building, my wage income was reduced, which means I paid less in terms of Social Security and Medicare taxes.   When I sold the building, I had a hefty Capital Gains tax, to be sure, but it was at 15%, not 28% (plus the 18% Self-employment tax) and it was deferred for a decade.   Yea hate me, I'm just like Mitt Romney, on a much smaller scale).

But as I noted in my last posting on Social Security, I think that comparing it to Stock Market returns is a bit of a hooey.  Why?  Because while it has investment-like aspects, and is, in some ways, like an annuity, it is also a little like welfare another other "entitlement" programs.  We can calculate "rates of return" and theoretical rates of return, but the bottom line is, what you get back when you retire will be what Congress decides you get back when you retire.

And since Social Security is such a political football, there is no way to guarantee you will get anything back at all.  And in fact, this seems to be the perverse promise of the Romney Campaign for those under age 55.

Many younger people, who are paying Social Security taxes, think this is a swell idea - that they will somehow avoid paying into Social Security and thus come out ahead.   Think again.  This proposal to gut Social Security for us "youngsters" does not mean that we won't end up paying for the entire baby-boom generation's retirement.   By their own admission, the GOP has said that folks over 55 will get all that booty and largess.  But they fail to state how they will pay for it.

In other words, the Social Security taxes will have to remain the same for us younger folks, in order to pay for the retirement of the baby boomer generation.   The punchline is, when we retire, we will get nothing.

Does it have to be this way?  Is this a "solution" to our Social Security "crises"?  I think not, for several reasons.

First, there is no "crises" - whenever a politician tells you there is a "crises" in Washington, it really means that there is a lack of willpower, or an intentional gridlock being created to foment dissent and create election year issues.   The "solution" to our Social Security "crises" is the same one they have implemented every other election year, going back to the date of my birth - they increase the cutoff level for taxes and trim benefits.

The idea that the non-existent "trust fund" will "go broke" at current tax levels and benefit levels by some Mayan calendar date, is just a lot of hooey.  It is like saying, "You know, if you get on the Interstate and drive 100 miles without ever turning your steering wheel or applying the brakes, you will eventually drive off a cliff!  Watch out!"   But of course, you would slow down and steer away from the cliff, long before that.   It is another argument aimed at the idiot voter.

Second, Baby Boomers will Die:  Yes, I know, for some of you, this can't happen fast enough.  And on some days, I feel that way myself.   But while we have a "bulge" in our elderly population right now, it is not a permanent thing.  If you look at the age pyramid, you will see the succeeding generations (the ones right after I was born) are smaller.  So eventually, we will see fewer retirees and more workers, and the ratio will rebalance.  And given the health problems of this generation, I suspect many will not live to collect much in Social Security.  Yes, there is a bright side to our obesity epidemic and Type-II diabetes!

On the flip side, the bottom of our pyramid could be easily filled up, once certain politicians stop beating the drum for xenophobic immigration policies.   Bring in the immigrants - and let's grow our country again.  (By the way, this is really the underlying "problem" with our economy and its lack of growth.  When population growth stalls, growth stalls.  The easiest way to fix this is to import more people).

Third, de-funding Social Security or "Privatizing" it, as some have proposed (including Romney) will create more problems than it will solve.   A social "safety net" can't be turned into an "investment plan" without creating havoc.   If we convert Social Security into an investment program, there will always be a small percentage (or large percentage) of people who fail to invest, fail to invest wisely, or are victims of market swings at the time of their retirement.   What will happen is that these people will have little or no income in retirement, and either end up destitute as street people, or be applying for SSI or other forms of direct welfare payments.   Either way, we "pay" for these folks, there is no "savings" in cutting people off at the knees.

In a way, it is like the health care debate.  Letting people be uninsured doesn't "save" us any money - we still have to treat them, in the most expensive way imaginable - the Emergency Room.   They don't pay, so the hospital swallows the bill, adding the expense to our treatment, and thus raising our rates.  Hospitals in poor areas end up going bankrupt.   It is a stupid way to do business, to say the least.

Doing the same with Social Security would be equally as dumb.

* * * 

This is an election year.  And no one can knock out an incumbent when everything is going just fine, or at least going OK.   So, if you want to get into office, you have to make alarmist arguments about the economy, Social Security, the national debt, the deficit, or our National Security.   You amplify things and instill FEAR in people's minds, so they vote for you.  And over the last four years, we have been hearing this drumbeat of FEAR from the GOP, while at the same time, our "do-nothing Congress" refuses to pass any legislation that will help, as they want "my way or the highway".   And this is by design, of course, as gridlock works in their favor.

Yes, there are some folks who will destroy the village to save the village - or even destroy a country.  We saw this in the Russian Revolution.  We saw this in Germany in the 1930's.  We saw this in Afghanistan when the Taliban took power.  We saw this in Iraq during the Iraq war - and even today.   If you can create chaos, it works to the advantage of the outsiders.  People will get so tired of strife, they will embrace extremist causes, for, if nothing else, to make the strife come to an end.

Sorry, but I ain't buying it.