The latest proof of Social Security myth is summarized in an article written by James Roosevelt , Jr., the grandson of Franklin Delano Roosevelt, the President who created the Social Security system. The article, "Social Security's Enduring Truths," which appeared in the current issue of the AARP magazine, is rife with stupid Social Security myths. However, to fully understand the myths, one must understand how the system works:
- A citizen pays money into the system from their current wages.
- This money, better defined as wealth, is taken into the system and paid out to current Social Security recipients, with the excess wealth beyond current payouts being given to the Treasury Department.
- In turn, the Treasury Department gives the Social Security Administration the equivalent of a paper government IOU for the money/wealth that the Treasury Department took in excess of what benefits were paid out.
- The political class then uses this excess Social Security wealth/money to run the government, for better or worst, as if the money from Social Security was collected as general taxes/revenues.
- Mr. Roosevelt says: "But this is also a generation [baby boomers] that has been paying into the [Social Security] system since they started working in the early 1960s. Much of the money that boomers are and will be drawing from Social Security is and will be their own."
This is totally incorrect. The money that baby boomers have paid into the system via their pay check deductions over the past years has been spent long ago. As the money from younger Americans is paid into the Social Security system, that money and wealth is immediately sent right back out as payments to retired, older Americans.
The money that each baby boomer paid in did not get placed into some mythical type of individual bank account. Thus, Mr. Roosevelt's assertion that baby boomers will be drawing down "their own" money is a fallacy, their money was spent long ago either as benefits or it was spent, or likely wasted, by politicians.
- Mr. Roosevelt tries to paint Social Security as a great retirement option, stating that "The administrative cost is .09%. It returns more than 99 cents to beneficiaries on every dollar collected. I dare you to find a private retirement plan that can claim that."
I do not disagree with his numbers, just his somewhat shallow conclusions that these are great numbers. First of all, this is a lousy retirement and investment plan in that for every $1.00 that goes in, less than a dollar comes out. While the difference is not great, it is still a negative return. I could place my Social Security payments in a low yielding bank savings account and still get a better return than the negative return Mr. Roosevelt claims is a good thing.
Second, in previous posts I have already discussed a more extensive analysis that explodes Mr. Roosevelt's conclusions that this is a good plan. I assumed that the money that was actually paid into the Social Security system on my behalf, beginning with my first high school job, was instead placed into a tax deferred retirement fund, like an IRA account. That money was then invested solely in an S&P 500 index investment fund. That account was allowed to grow, or shrink over the next forty years or so, based on the changes in the S&P 500 index fund.
The results show that if I had maintained control of my Social Security wealth and deductions, I could retire with about twice as much in monthly payments than I will get via Social Security. If I had been more conservative in my investing and invested only in long term Treasury bills, then I could have retired with about 33% more than what I will get from Social Security.
Thus, Mr. Roosevelt is wrong, I can easily show him a retirement plan that blows Social Security returns out of the water since I would have generated substantial positive returns. The government operation of Social Security generates a negative return.
- The article claims that at the end of 2010, the Social Security trust fund had a positive balance of $2.6 TRILLION. However, what he calls a trust fund is nothing more than $2.6 TRILLION worth of Treasury Department IOUs. Remember, from the above discussion, the political class stripped Social Security of excess funds/wealth and left behind basically worthless IOU paper over time.
In fact, in 2011, due to the bad economic times, the Social Security Administration had a negative cash flow. In other words, the Social Security Administration paid out more money, cash, and wealth than it collected in Social Security wage deductions. How did it manage this? It went to the Treasury Department, who floated bonds to start paying back Social Security IOUs.
There is no pile of money laying around in the Social Security vaults. Trust funds , IOUs, etc. do not matter, the only thing that matters is cash. Thus, the Social Security now needs Americans to pay more in taxes to pay out current Social Security benefits. There is no trust fund pot of money that will last until 2036 and be able to pay out full benefits until then, as Mr. Roosevelt asserts.
His conclusions shows a basic ignorance when it comes to cash flow and real wealth. An IOU is not wealth, it is a promise to pay. That promise has to be fulfilled by the government going out and confiscating more money form the American public today in order to pay out benefits to the levels promised by short sighted politicians from the past.
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- The final point of discussion is briefly mentioned by Mr. Roosevelt and is then ignored: "The purveyors of fear want you to believe that boomers are retiring on the backs of their children and grandchildren. If you buy that, they have statistics showing fewer contributors supporting more beneficiaries' proof that the program is unsustainable."
He then goes onto other topics without addressing the very real problem of the growing number of Social Security recipients and the relative dwindling number of those paying into the system. Ignoring this reality does not make the problem go away.
According to the Social Security website, way back in 1940, there were 159 payers into the system for every retired worker receiving a Social Security check. Back then, this seemed like a good deal. Small sacrifices by 159 workers to support one older American in retirement.
However, this ratio started to quickly shrink so that just ten years later, the number of payers per retiree was down to 16. Today, that ratio is only three payers to one beneficiary and within twenty years that ratio will be down to about two to one. How Mr. Roosevelt can ignore this reality is unconscionable. Consider what this reality really means:
- According to the Social Security website, the overall average annual Social Security payout is about $12,924 a year.
- If the number of workers supporting the system is down to only three to one, then each of those three Americans is basically paying the one retired American $4,308 a year for their retirement.
- Since the average American household has about $60,000 a year in income, then the average working family pays more than 7% of its gross income each year to support one retired American.
- In twenty years, all other things being equal, that average American family will be paying $6,462 to support one retiree which will be more than 10% of the family's gross income and much more than the family's net income after income taxes, sales taxes, gas taxes, etc. are considered.
- In 1940, all other things being kept relative, the average American family, along with 158 other Americans, would only be paying about .1% of their family income.
I believe Abe Lincoln is responsible for the following riddle: if you called a tail a leg, how many legs would a dog have? Answer: four, calling a tail a leg does not make a leg:
- Calling Social Security a great retirement plan does not make it so. We proved that above, Social Security pays out less than it takes in and far less than if that money had been privately invested.
- Calling Social Security a non-burden on our kids and grandkids does not make it so, there are too many baby boomers entering retirement.
- Saying that the money people paid into the Social Security system is waiting for them is a lie, their contributions were spent long ago.
- Pretending that Social Security has trillions of dollars in its trust funds does not mean that real wealth and real money is there.
- The retirement age needs to be raised to 70 since people are living much longer today than when the Social Security was implemented, invalidating one of the original premises and assumptions supporting the system. A hardship exception would be available for those that cannot afford to wait until they are 70 years old.
- Wealthy older Americans would not receive a Social Security check at retirement age in order to have enough funds for those that really need the money for life and death purposes. People like Warren Buffet, Bill Gates, Donald Trump, etc. have more than enough money to make this sacrifice, freeing up money for much needier Americans.
- The tax rate for Social Security needs to be lowered significantly but the maximum amount taxed uncapped and to include all forms of income, not just wages. This would level the percentage of each American's contribution to Social Security which is currently negatively skewed towards lower earning Americans.
The only enduring truth about Social Security is that it is in serious financial trouble and needs bold actions to fix it. Unfortunately, our political class keeps trying to make this tail into a leg, something that Abe Lincoln knew could not be done.
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