Brent Nyitray
Fairlington Blade
Let the mutherfuker burn!
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Kevin S. Willis
Michigoose
lmsinca
markinaustin
Memetrics
novahockey
quarterback
ScottC
yellojktThe question of whether SS is sound on an actuarial basis came up on an earlier thread, and I decided to do some analysis to see whether a person of average income can expect to get more out of Social Security than he puts in.
My hypothetical person, Harry, was born in 1945, began work in 1967 at the age of 22 and retired in 2010 at the age of 65. In every year of Harry’s career he earned the average income for an American in that year, as reported by the US Census (an Excel file). The data was separated out by sex, so I took the weighted average of the 2 for each year. I then used the Social Security benefits calculator to input each year’s income and establish what Harry’s monthly benefit would be based on his annual earnings. I used the historical payroll tax to determine how much Harry would have contributed to SS in each year of his career. Note that Harry’s contribution was half of the posted rate, as his employer paid the other half. Finally, I used historical US Treasury yield data to determine an average rate of interest earned on his contributions.
This is what I found.
In 1967, Harry earned $4,509 of income, which grew to $38,336 in 2010, the year he finally retired. Throughout his career, he averaged $19,769 dollars in annual income. He paid a total of $51,779 in payroll taxes over his 44 working years. The average 1 year and 10 year Treasury yield between 1967 and 2010 was 6.35%. Using this average yield compounded annually, Harry’s contributions will have earned a total of $108,779 by 2010, making his total contributions to Social Security $160,558.
Given Harry’s annual income, his calculated monthly SS benefit will be $1,501, for an annual total of $18,012. This means that he will have recouped his contributions within 8.9 years of his retirement, or by the time he is 74. If we assume that his remaining contributions continue to accrue interest until they actually get paid, and we assume a currently very generous interest rate of 3%, his contributions will last for 10 years, or until he is 75.
Now, according to these CDC tables, when Harry was born in 1945, his life expectancy was roughly 68 years. And by the time he started working at the age of 22 in 1967, his life expectancy had climbed to about 73 years, almost enough for him to get back what we now know his full contribution to Social Security would end up being. But having made it to 65 in 2010, he could expect to live over 18 more years. Meaning that, at $18,012 per year in SS benefits, Harry can expect to receive $324,216 in benefits…more than twice his contributions and earned interest over the course of his working life.
Recall here that Harry is just average. Average income, average contributions, average life expectancy at retirement. Seems to me that the government has promised the average person far more in SS benefits than they have been expected to contribute to the system. Can the US really be expected to honor such crazy promises in perpetuity?
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All Things in Moderation 
By your life expectancy charts, there are many who contribute and do not recover. There is Darlene, who married and effectively lost her own benefit by doing so.I agree with you that we must be overpaying, but only because the the trust fund is not expanding. Even your bare numbers for Harry indicate the program is easily fixed, and contraindicate Ponzi.
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OT:Slovakia scuttles Greece!http://www.washingtonpost.com/world/europe/slovakia-rejects-european-bailout-plan/2011/10/11/gIQAvKaHdL_story.html?wpisrc=nl_wonk
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Mark:By your life expectancy charts, there are many who contribute and do not recover.True. And there are many who live even longer than Harry and end up getting even more than double what they paid in. That was the point of using an average person with average income who lives an average life. If the average person is receiving double what they paid in, it is not a viable program, at least as either insurance or an investment vehicle, even if many people recover less than what they paid in.There is Darlene, who married and effectively lost her own benefit by doing so.I don't understand this. the SS website "A married couple's lifetime earnings are calculated independently to determine their benefit amounts. Therefore, each spouse receives a monthly benefit amount based on his or her own earnings."
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Mark:Even your bare numbers for Harry indicate the program is easily fixed, and contraindicate Ponzi.Sure. If individual payouts are reduced to strictly a function of what has been paid in plus investment income plus what won't be collected based on actuarial tables, it can be "fixed". But then again any Ponzi scheme can be "easily fixed" by turning it into something other than a Ponzi scheme.
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From the same website:If you are eligible for both your own retirement benefit and for benefits as a spouse, we will always pay you benefits based on your record first. If your benefit as a spouse is higher than your retirement benefit, you will receive a combination of benefits equaling the higher spouse's benefits.I have always taken that to mean in practice that the lower earning spouse essentially forfeits her contribution.
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Mark:The way that I read it is that a spouse is entitled to a benefit, based on the contributions of the working spouse, even if they themselves never worked and therefore never contributed to the program. If they did work and contribute, they receive the higher of their own benefit or the spousal benefit.Now, that situation can certainly be perceived as a windfall benefit for a spouse who never worked, but it doesn't strike me as accurate to say that a working spouse has to "give up" their own benefits.
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"I don't understand this. the SS website "A married couple's lifetime earnings are calculated independently to determine their benefit amounts. Therefore, each spouse receives a monthly benefit amount based on his or her own earnings.""I don't understand that, either. But I do understand that the benefit reduces the earlier you take it (and this could reasonably be extended). That people pay into it all their life and then die. That when my wife's father died, he hadn't received all he had paid in during his lifetime and got an extra month back (since we called about a post-death check, and they told us to write them a check out of the estate, which we did, and then they also deducted the amount out of his bank account they did the direct deposit to, in addition to cashing the check). Of course, the combination of SS as a form of retirement annuity and a form of disability insurance is part of the problem. While it's difficult to qualify for the disability portion of SS, people do, and those people obviously consume a lot more than they paid in. For managing the system, it might make sense to separate SS and DI (Disability Insurance). I tend to agree with Mark, that with modest changes, SS can be fixed, and is in much better shape than other entitlement programs. That having been said, I do wonder what will happen if medical technology (which is pushing forward in leaps and bounds) make a significant impact on lifespan. I believe we will see true fountain of youth technologies within 100 years, the kind that extend life for 30 and 40 and 50 years, if not more. I also think we'll crack the nut on most if not all cancers, Alzheimer's, diabetes, heart disease and more–meaning that fewer and fewer people over the next 50 years will die before having collected all their SS contributions and then some. Yet without a radical reduction in population (that wouldn't happen for a generation, even if we collectively realized that 100 year olds would still be gainfully employed and thus competing for jobs in 2075). I like the idea of radical productive life extension, but I would suspect it would be hell on the economy. Yeoman's work on that analysis, Scott. Good stuff!
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"I have always taken that to mean in practice that the lower earning spouse essentially forfeits her contribution."Ah! I see now. I tend to suspect that doesn't do much to help the solvency of Social Security. It's better than paying the sum total of both her benefit and her husbands for the rest of her life after her husband passes, but she would actually be collecting more than her original benefit contribution level would dictate, so . . . that doesn't help solvency. Only the folks who die before they collect the full (and sometimes any) money out of the system help long term solvency.
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The lower income spouse forfeits their contribution on the death of other spouse. Also, have you factored in the difference between taking SS at 62 versus full retirement age? Other scenarios include working seniors. If you draw SS at 62 but continue working for every two dollars you earn they take one back, and also if you earn enough, you continue to pay taxes even on your SS earnings.
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BTW, a Ponzi scheme is technically called that because it's being sold as an investment that grows in a dividend bearing way, when, in fact, it's a money losing proposition, skimmed generously by the administrator(s), where the illusion of profitability is sustained by paying old withdrawals with new deposits. While some politicians may get it wrong, it's common knowledge that, like many pensions, SS is a defined benefit program. Such programs are predicated on the assumption that while some people will collect more than their full contribution, others will collect less (hit by a car at 55 and die? no benefit for you). Many pensions are based on this same concept, which, in itself, isn't that different from insurance. The problem comes when systems offer pay offs that are crazy high, even for the highest paid employees (certain pensions are often treated like bottomless pits of money–boards agree to raise an important person's salary outrageously shortly before retirement, in order that their defined benefit–based on their last three years salary–is outrageously inflated). Double-dipping, early retirement–these are structural problems with particular pensions, but having nothing to do with the basic concept of a defined benefit.
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lmsinca: " Also, have you factored in the difference between taking SS at 62 versus full retirement age?"Sheesh! Talk about looking a gift horse in the mouth. Scott does all that work and, typical liberal, you're just asking for more. 😉 I kid, I kid, I'm a kidder. I'd also be curious to see a breakout between what SS pays in disability and what SS plays in retirement. Get on that! 😉
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Just throwing ideas out there Kevin. Isn't SS sound until around 2035 and even then, if nothing is done, can pay 75% of defined benefits? Obviously, we need to fix it so we can continue to pay at the 100% level, but it's not an actuarial nightmare, yet. Raise taxes slightly, increase the age slightly, put people back to work. An increase in median wage would be helpful as well and we could even legalize some immigrants who've been working under the table while raising their kids here.
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lms:SS will always be "fixable" by changing the rules as we go, ie forcing contributers to pay more and forcing beneficiaries to accept less and later. The fact remains that it is not a self-sustaining program and it survives because of one and only one characteristic…the legal power to force people to participate regardless of what the rules are or might be changed to at some unknowable point in the future.
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I guess the decision then scott, is do we want to maintain the program or not? Take a poll or read a poll, you'll find most people will want to keep it going. A little fix every 50 years or so doesn't seem too unreasonable to me.
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lms:I guess the decision then scott, is do we want to maintain the program or not?I can't speak for "we". I can only speak for me and I do not.
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Yeah I get that scott. Luckily for the rest of us you're not the majority, yet. Tides swing but I think this one's not in your favor. That 90% of the population that doesn't make much money probably believes it's worth fixing and hanging on to, some of them are even conservatives.
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Pew Poll CNN Poll
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Another poll asking people about something the large majority of which scarcely understand at all. So many of the polls we are constantly fed amount to either "Do you want more benefits?" or "Do you want other people to pay more so you can have more?" Are these poll results heartening because of their political consequences even though people might be completely misinformed and wrong?
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qb, they vote.
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interesting to see the the splits on the support for a partially private option in lms' polls. would love to see that broken down by age/income etc.
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Yeah, I noticed that as well NoVA, should give you hope at least. I know that's something Kevin favors and may be a compromise position down the road. We'll see.
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"completely misinformed and wrong"AKA disagree with QB.
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One thing to consider is, wouldn't Wall Street just love to get their hands on a larger portion of everyone's retirement funds? The only time in the last 30 or 40 years that my husband and I have made money in a retirement plan, was when we invested our own way and left the middle man out. We've made money on real estate, an insurance annuity, individual stock and treasuries. We always lost money when we went through an investment counselor via the normal mutual fund investment diversified route. Just something to think about.
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"AKA disagree with QB."Why, yes! I am finally getting through.
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Older and wiser people would include the guy whose complaint is that he was fired after criticizing his company on his blog, and fell on hard times as a result. How are we supposed to take seriously a "movement" in which this is a typical complaint? If it is just a collection of people who are angry and hurt but without any defining point to make or agenda to seek, then how does such unfocused, random anger help anyone or tell us something important other than that there are angry people out there? Do they want more government, more regulation, more redistribution, more benefits? Something else entirely?
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I probably need to pay closer attention to the people that make OWS before I wade too much further into this debate. I just look skeptically at such sweeping generalizations about a group someone disagrees with. And I become downright rightiously indignant if I happen to lean in the same political direction as that group. If this was a republican group I would probably smirk at the genralization and move on.That said, one of the criticisms of the movement has been a lack of direction. The lack of direction isn't too surprising given that the movement is in it's infancy, but I fee like there is something more than that holding them back.
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re: SS i think an individual account is a fair compromise. some part of the payroll tax goes into the account holders plan and it's treated as property with rights of inheritance, etc. also would prevent SS spillover into general funds and the issuance of the special treasury bonds. re: OWS, i think it a simple as "i'm mad as hell"you get the professional protesters to build it and the rest will come. at least, that's what I'm seeing in DC. apparently the group(s) at freedom plaza secured a permit back in April. and they are not associating with the group at camped out on K-street, which did not go through the permit process. so maybe that one it more spontaneous.
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The reports I've heard indicate that OWS was quite professionally organized. Heck there are photos of them siting at computer tables, detailed agendas that look like they are for corporate meetings, professionally manufactured signs.
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