The Latest Depressing Facts and Lingering Myths About Social Security

Many times we have discussed how bad Social Security is from a retirement investment perspective. We demonstrated how bad this program is in several different ways in past postings:

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1) From our November 11, 2011 post, we reported that an government analysis from the late 1990s proved how lousy a retirement program Social Security is. On November 12, 1999, the Federal Reserve Bank of San Francisco published an economic analysis of the system's financial rate of return. The highlights of their findings include:

•The average worker in the Social Security system attains a rate of return on their Social Security contributions that is less than 2% when adjusted for inflation.

•In 1999, an American could have gotten almost twice that rate of return by personally investing in Treasury bills that at that time were averaging about 3.5% on an inflation adjusted basis.

•Even with the low rate of return, the analysis concluded that this low rate of return should be viewed as "rosy" since the political class had not addressed the long term solvency issues facing the Social Security system and those issues would either result in higher Social Security taxes or lower Social Security pay outs in the future.

•The San Francisco Fed concluded in 1999 that failure to address the solvency issues would reduce the average rate of return on Social Security contributions to around 1%.

•Not mentioned in the study, but what is obvious, is that if the rate of return on Social Security is only between 1% and 2%, this pales in comparison to what an American could have gotten over a long term investment of their Social Security contributions in an average stock mutual fund.

•The study takes note that numerous ideas have been put forth but Congress, i.e. the political class, had not acted on any of them, and concluded with the warning that "continued delays in addressing Social Security's long-term financing problem will only lead to more painful adjustments in the future." Twelve years later this situation of inaction has not changed.

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2) From our January 4, 2011 post we went through the following analysis based on my own Social Security situation. Using my latest personal statistics from the Social Security Administration at that time, I put together a simple spreadsheet to do some what-if analysis. The main assumptions and calculations in this spreadsheet include the following:

1. I calculated all of the money, year-by-year, that my employers and myself had contributed into the Social Security pool.
2. I assumed that I would have been able to keep that money but had to invest it in a tax free IRA or 401k account immediately.
3. I then located the historical annual S&P stock market investment returns and assumed that I put all of the Social Security money into a low cost S&P stock fund.
4. I grew, or shrank, my pool of money every year based on the S&P rate of return.
5. Starting this year, I assumed that I would get more conservative with my investment strategy since I am approaching retirement (I am 57), a standard investment tactic. Thus, I assumed that I could get a 4% return with this more conservative investment approach and that I would stay at this 4% conservative approach for the rest of my life.
6. Social Security tells me that age 62 I can start receiving monthly Social Security payments of $1,592. This becomes my bench mark.

How much better or worse would this approach have been vs. what Social Security will pay me? Consider the following spreadsheet results:

•Under the above assumptions, starting when I was 62 years old, I could take out twice as much than what Social Security will pay me and not run out of money until I was 88 years old. At that point, if I was still alive, I could live off of other investments and savings.

•Under the above assumptions, starting when I was 62 years old, I could take out 75% more than what Social Security will pay me and not run out of money until I was 95 years old. At that point, if I was still alive, I could live off of other investments and savings.

•Under the above assumptions, if I wanted to be conservative, I could take out 50% more than what Social Security will pay me and not run out of money until I was 100 years old, at which point I would still have a $267,000 in my account.

Thus, a different approach from the Urban Institute but the same result: I am far better off investing my own money using standard investment knowledge than letting the political class dictate and control my retirement money and life style.

Another positive aspect of this theoretical approach is that I would have had the wealth and money under my control. I would not be subject to the whims and ignorance of the political class and subject to their control. Its called freedom and the con job of Social Security does rob us of some of our financial freedom.

- Don't believe the stock market is a sound way to save for retirement? I took a much more conservative approach to find out if and when Social Security ever becomes a better deal. Using the same model above, I changed my long term investment approach so that it was not invested in an S&P stock fund but it was invested in long term U.S. T-Bills. I went to a government website to locate the historical annual returns of long term T-Bills. This is theoretically a safer, more conservative investment approach. What did I find out:

•Under the above assumptions, I could take $1592 out of the account each month, the same amount as what Social Security will pay me, and at age 100, still have $50,000 in the account.

•Under the above assumptions, I could take out 20% more than the $1592, and enjoy a 20% better life style, and not run out of money until age 92, if I lived that long.

In either approach, I and probably tens of millions of other Baby Boomers would have been better off if the government had allowed us to take care of our own retirement. They did not and now we are in a quandary, with unwilling or unable leadership to solve a problem that might sink the nation. And unless major changes are made, this con job will continue for generations of Americans to come.

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3) Also from that January 4, 2011 post we reviewed the work of two economists who work for the Urban Institute. An Associated Press investigative report at that time highlighted the work of two economists, Eugene Steuerle and Stephanie Rennane from the Urban Institute. Their research examined just how well the Social Security program performs financially and whether it is a good investment vehicle for individual citizens.

In the AP article reporting their results, the two economists looked at an average-wage, two earner American couple earning $89,000 a year. Upon retiring in 2011, they would have paid $614,000 into the Social Security program.

But according to the payout schedule and the Urban Institute analyses, this couple can expect, on average, to receive only $555,000 in Social Security benefits. Thus, this analysis shows that as an investment and retirement vehicle, the Social Security program yields a negative 10% return rate on investment. In other words, you would have been better off taking the money you earned, but confiscated by the government to sustain Social Security benefits for retired Americans, and put it under your mattress. If you had a broker getting negative 10% returns on your investment, you would fire them.

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4) In our November 14, 2011 post we discussed similar work on Social Security's viability by the Heritage Foundation. In 1998, the Heritage Foundation published a similar analysis that showed an average married couple would have been rewarded with twice their Social Security payments if they had been allowed to keep the money that was contributed to the Social Security Administration in their name and been allowed to invest it tax free in a balanced bond stock mutual fund.

It is pretty clear that the Social Security program is now a very poor choice for a retirement vehicle. And it may even be getting worse, based on an updated Urban Institute analysis that was reviewed by an Associated Press (AP) article from August 5, 2012:

• Americans retiring today and going forward in time are the first generation of workers who have paid more in Social Security taxes during their careers than they will receive in benefits after they retire.
• The AP calls it "a historic shift that will only get worse for future retirees."
• The AP reviewed several historical scenarios to prove this last conclusion. If an American retired in 1960, they could expect to get back seven times more in benefits than they paid into Social Security taxes while working. That ratio would have improved beyond seven to one if that worker was a low-income worker, as long as long as he or she made it to age 78 for men and 81 for women.
• As recently as 1985, workers at every income level could retire and expect to get more in benefits than they paid in Social Security taxes, though they didn't do quite as well as their parents and grandparents.
• A married couple retiring last year after both spouses earned average lifetime wages paid about $598,000 in Social Security taxes during their careers. They can expect to collect about $556,000 in benefits, if the man lives to 82 and the woman lives to 85, according to an updated, 2011 study by the Urban Institute, a Washington think tank.
• Demographics are the driving force beyond the upcoming fiscal collapse of the Social Security system. In 1960, there were 4.9 workers paying Social Security taxes for each person getting benefits. Today, there are about 2.8 workers for each beneficiary, a ratio that will drop to 1.9 workers by 2035, according to projections by the Congressional Budget Office.
• About 56 million people now collect Social Security benefits, and that number is projected to grow to 91 million in 2035. Thus, today's problems and financing shortfalls are likely to get worse over time, further endangering the future payouts to retirees and making Social Security an even worse retirement option for most Americans: "Future generations are going to do worse because either they are going to get fewer benefits or they are going to pay higher taxes," said Eugene Steuerle, a former Treasury official who is now affiliated with the Urban Institute. 

As distressing as this news and these bad retirement financials are is the continuing ignorance of how bad this process is and how bad shape the process is in:

- Statement from the article:  "The trustees who oversee Social Security say its funds, which have been built up over the past 30 years with surplus payroll taxes, will run dry in 2033 unless Congress acts."

Why it is a myth: Just recently the Social Security process went into a negative cash flow situation, i.e. it is paying out more in benefits then it is collecting in taxes. This situation will not change any time in our lifetimes since there are more people retiring, and drawing Social Security benefits, than there are not enough new workers joining the work force to support a positive cash flow.

There is no wealth in the so-called "trust fund." Starting back in the late 1960s, President Johnson allowed general government tax revenues to be co-mingled with excess Social Security funds and spent, and likely wasted, by the political class. In exchange for giving real wealth to the politicians since then, the Treasury Department gave the Social Security Administration some accounting IOUs to cover the confiscation of real wealth from the Social Security process.

There are no gold bars, shares of Google stock, piles of cash, etc. sitting in the trust fund. The Social Security trustees are now dependent on the Treasury Department to go out and raise money via debt financing to fund today's Social Security checks, just one reason why our national debt is skyrocketing. The trust fund will not run dry in 2033, it is already dry of real wealth.

Statement from the article: "But returns alone don't fully explain the value of Social Security, which has features that aren't available in typical private-sector retirement plans, said David Certner, legislative policy director for AARP. Spouses can get benefits even if they never earned wages. Children can get benefits if they have a working parent who dies. People who are too disabled to work can get benefits for life. Because of spousal benefits, most married couples with only one wage earner will continue to get more in benefits than they pay in taxes for the foreseeable future."

Why it is (mostly) a myth: This is no different than what would happen under my personal scenario discussed above or some of the more logical privatizing solutions that some in Washington have proposed. If I had passed away under my scenario, my wife and my son would have still gotten my wealth via my retirement accounts without it first being inefficiently handled by the government. Thus, this concept is not unique to Social Security.

Mr. Certner really has to really contort a scenario to make Social Security look good. According to him, it is still a positive payout if one spouse did not work and the other did, then the payout is positive. However, given that over the past few decades most households have had to have two working spouses to survive, how many times will Mr. Certner's scenario of positive return payout vs. the probably much larger times it will not pay out?

Now while it is true that privatizing Social Security via my plan would not handle disabilities as well as Social Security, given how much better off I would have been if I had managed my Social Security payments, putting a small tax on those much larger earnings could be a way to handle the disability issue.

A bad retirement investment option, and getting worse, shrouded in myths and misconceptions. Hardly a good way to ensure the happy retirement of tens of millions of retired Americans. Hardly a good way to help younger Americans save for their own retirement.

But more than a decade after credible minds proved the disastrous course the Social Security system was on, almost every politician since then has not had the courage, fortitude, smarts, and will to make the necessary changes to fix the short term problems and the long term problems. Four steps from "Love My Country, Loathe My Government" would go a long way to fixing the whole mess:

1. The first step is to raise the retirement age to 70, with a hardship exemption for those that cannot afford to wait that long. Americans are living much longer than they did when the Social Security process was put in place but little has been done to address this issue.
2. If any American has a net worth of over $3 million, they would not be able to draw a Social Security check at any age until their net worth fell below $3 million. Better to save limited and shrinking funds for Americans who most need the support rather than continue to pay out checks to people like Buffet, Trump, Gates, etc. who do not need the Social Security checks for survival.
3. Reduce the tax rate of the Social Security tax process but uncap the max and apply the lowered rate to all forms of income, not just wages. The detailed math for this process is in the book.
4. And finally, implement term limits for all Federal politicians. Many of them have been in office for 10, 20, or more years. They have not solved this problem so far so we must now assume they have become part of the problem.

Long term, after we have fixed the short term financial status for current and near current retirees we need to get the political class and the Federal government out of the retirement management business. They have proven they do not know how to do it effectively and many others have proven that fact over and over.

For a view of how that might happen, please review the success story of the Chilean reformation of their equivalent Social Security system at the following link. It reviews a real life example how much wealthier Chilean retirees are now vs. how much poorer they would have been if their central government still ran the operation:

http://loathemygovernment.blogspot.com/2012/02/united-states-of-purple-presidency-some.html

Chile did the right thing decades ago and it worked. We need to find some leadership, which is current lacking, to do the same here today for the sake of both the retired and the working citizens of this country.

Please visit our Presidential website, "The United States Of Purple," at:

http://www.unitedstatesofpurple.com/

The United States of Purple is a new grass roots approach to filling the office of President of The United States by focusing on the restoration of freedom in the United States, focusing on problem solving skills and results vs. personal political enrichment, and imposing term limits on all future Federal politicians. No more red states, no more blue states, just one United States Of America under the banner of Purple.

The United States Of Purple's website also provides you the formal opportunity to sign a petition to begin the process of implementing a Constitutional amendment to impose fixed term limits on all Federally elected politicians. Only by turning out the existing political class can we have a chance of addressing and finally resolving the major issues of or times.

Our book, "Love My Country, Loathe My Government - Fifty First Steps To Restoring Our Freedom And Destroying The American Political Class" is now available at http://www.loathemygovernment.com/. It is also available online at Amazon and Barnes and Noble. Please pass our message of freedom onward. Let your friends and family know about our websites and blogs, ask your library to carry the book, and respect freedom for both yourselves and others everyday.

Please visit the following sites for freedom:

http://www.cato.org/
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http://realpolichick.blogspot.com/
http://www.flipcongress2010.com/
http://www.reason.com/
http://www.repealamendment/