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CBO on SS – It’s a Terrible Deal for Most People
Both Mitt and Barack spoke about Social Security (SS) in their debate. For political reasons, they took the same approach. They indicated their continuing support for this busted program. They agreed that some “tweeks” might be necessary, but there would be no fundamental changes to America’s largest entitlement program.
I wish that one or the other of the candidates had spoken the truth about SS. The fact is it is a terrible program for the vast majority of workers who are forced to contribute to it in order to keep this dog alive.
Fortunately, the Congressional Budget Office has provided the information necessary to look at SS and evaluate how various income groups will fare over their lifetimes. The bottom line is as ugly as it can get. The fact is that SS is stiffing 80% of American workers.
The key statement from the CBO report (link):
For people born in the 1940s or later who have household earnings in the second quintile or above, the present value of taxes will be, on average, more than the present value of scheduled benefits.
Got that lovers of SS? 80% of the people who contribute to SS get less than what they paid in. Only the bottom 20% of income earners have a chance of breaking even.
The CBO provided a chart that describes the consequences to various income groups. I found the CBO presentation a bit confusing and also misleading. The following is the original chart from the CBO, after that is my stripped down version.
My version of the CBO chart:
I) - My chart eliminates all of the information marked “Scheduled Payments” (SP). This term refers to a theoretical number that an individual is accruing according to a schedule at SS. But that number is not going to be paid to a substantial number of workers. The law says so. From the CBO report:
Taxes are projected to be insufficient to pay for scheduled benefits
If you’re under 55, nix to any thoughts you might have on that statement from SS about your SP. All that information in dark blue is just smoke. (I don’t think they even send SPs anymore)
II) I eliminated the info for those born after 1940. It’s not significant.
My revised chart allows most people working in America today to evaluate what his or her results from SS will be. Consider the following when trying to find where you fit in:
-The data is a ratio of the NPV of contributions one will make versus the NPV of the benefits one will receive. 100 is breakeven. If you are below the 100 line, your a loser.
-The results are presented in vertical bars. The bars represent a range of outcomes. The key variables are how long you worked, and how long you will get benefits before you die. It is 80% certain that you fit into this range of outcomes. If your not sure about those variables, assume you are at the midpoint of the appropriate range.
-No information is provided for the second and fourth quintile of income earners. The language the CBO uses (above) confirms that the second quartile also suffers from negative net returns from SS. Those in the fourth quartile are deeply in the red.
-The following is the information on annual income by quintile. The first line is the CBO numbers from 2009, the second line is my updated numbers for today (I think I’m pretty close with these estimates)
Did you find yourself in this chart? Are you surprised by the results? My conclusions:
If you are on the bottom of the income scale today, and you expect to remain at the bottom for the rest of your working life, then you will be happy with the results that SS will deliver to you. Only a small portion of those in the lowest income bracket will face a negative return on their SS contributions. If you are on the bottom rung, you can expect, on average, to get about $1.25 back for every dollar you (and your employer) have kicked into the rat hole of SS.
If you are not now at the bottom, and/or you don’t expect to be in that position for the rest of your working life, then SS is a very bad deal for you. Fully 80% of all workers will see a negative return on the money they are forced to put into SS.
I don’t get it. Both political parties want to keep SS as it is, or raise taxes further to “strengthen” it. I believe that if there were a poll of workers asking if they were pro or con on SS, the results would conclude that a majority wants the program to continue. But 80% are getting screwed.
12.4% of an individual’s compensation goes out the door to SS. If this burden were eliminated, the economy would thrive. Unemployment would drop as the extra take-home pay works its way through the economy. As the economy expands, tax receipts would rise.
Alas, there is no possibility to eliminate SS. The committed costs for the next 20 years are impossible to reverse at this point. This beast can’t be killed any longer.
There might be an alternative; an opt-out for younger workers. If there were an opt-out, I think that many workers would accept the deal. If there were a lot of folks who did not want to “pay to lose” with SS it would result in a huge hole. That hole would have to be filled. Some payroll tax would have to be applied to those who opt out. I have not seen any numbers on this approach (Hello – JCT), I estimate that a 2% tax on opt-outs would be required to keep SS afloat.
I’m curious what people think about an opt-out. If you respond, keep in mind that most of you are getting about 50 cents on the dollar for what you are now putting in. My question:
If you opt-out, you will get a net 10% pay raise for the rest of your life. Your income will go up by 12.2%, but you will get hit with a 2% tax that goes out the door. You will not get SS benefits when you retire.
If there were an opt-out, there would be consequences:
*The size of the government’s role in society and the economy would decline over time.
*The opt-out would result in a near-term stimulus for the economy as forced savings is converted into take-home pay and consumption.
*As SS has a source of revenue and no long-term liability (the 2% tax/no future benefits) the actuarial solvency of SS would remain about the same.
*Opt-outers would have to be much more diligent about their savings and planning for retirement.
The risk of an opt-out is that 25-30 years from now those who did opt-out end up with no savings and become a burden to society. Depending on the numbers, this could be a real problem. I say “could” as it is impossible to predict what will happen.
I can, however, say with certainty that the existing SS "plan" insures that there will be a major crisis with SS and the economy in less than twenty-years. That outcome is written in stone. It would be worth our while to consider the alternatives. I doubt we will be given a chance for any real alternatives from either Mitt or Barack. Their plans guarantee that we will hit an iceberg.
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What's your answer?
If you're asking me, it's a ways down below.
I trust myself to save but I don't trust others in their ability to save. And if they do not save than we are back to square one where us, the savers, will have to take care of everyone else who did not save.
A forced savings account is the only way to do that.
Just think before you call someone an idiot...thanks.
Its happening now in the uk, but the forced savings aren't ring fenced, so the govt if the day can just take the real savings of its citizens and leave an IOU for the next govt to pay its citizens, just another way of taking real money from people in exchange for the fake money they give out.
What's your answer?
I will not repeat the insult, but I doubt you understand why you were insulted, even yet.
"I trust myself to save but I don't trust others in their ability to save." And yet you trust THE GOVERNMENT to mind your savings, as well as everyone elses'? The same government who demonstrably lies about nearly everything it does or affects? Do you really mean that? The same government that invests - in Solyndra, Lightsquared, First Solar? What rate of return did Solyndra bring?
"And if they do not save than we are back to square one where us, the savers, will have to take care of everyone else who did not save." You CANNOT. If you try to take care of everyone who is irresponsible, you will go broke immediately, and if the country tries to, it will go broke eventually - AS IT IS NOW DOING!
"A forced savings account is the only way to do that."
I am not responsible for the failure of others to think, plan and act responsibly. "Forcing" anything is creating slavery - do you want to be a slave? Do you want the government to be able to tell you: "You must save 3% of your salary for your retirement" today, then "5%; our projections were off, you need to start saving 5%" tomorrow, then "10%; unfortunate economic conditions have prevented projected reserves from materializing, now you must save 10%" and finally, "Due to unforseen circumstances, your savings accounts have been nationalized to provide for the poor; you may line up at the post office to receive your daily slice of bread and cup of water, please don't be late or we might run out".
Ask anyone from Eastern Europe how central planning works out. Ask the Chinese - their economy is about to suffer the mother of all hard landings.
Government is a generalized illusion that leads to personal delusions - delusions of safety, reliability and justice that are all refuted by experience. Failure to learn from experience is what distinguishes sapients from sheeple - decide for yourself which you are, and live accordingly.
Well said, ED. What we need is some moral hazard. If you don't save enough, and outlive your Social Security, then too bad for you. Good luck. People will start to figure out they shouldn't be buying all the junk they buy, and spend time in casinos. Old people are notorious for buying crap for the sake of buying something. Useless trinkets. In Minnesota, we have 18 indian casinos. Go see all the Social Security checks going into slot machines sometime. Its amazing. You should see all the walkers, canes and wheelchairs that come off the junket busses.
SS is a particularly bad deal for men. Average life expectancy for men in the US is 75.6 vs 80.8 years for women. So if a man an a woman both contribute the same amount to SS and retire at the same age, on average the woman will collect SS for 5 years longer. This means the woman would collect 50% more if they retire at age 65.
The only thing men can do to minimize their disadvantage is to start collecting SS at the earliest possible age. Payments will be lower, but they will last longer.
It is really a question of who can one trust to hold the money. Used to think SS was a major screw job, but with the thieving CEO behavior in the stock market and banks over the last 12 years, SSI does not seem quite so bad.
There is also the larger social issue. Without some form of forced retirement and health set asides, there are going to be people literally dying in the streets. Having lived in countries with this type of situation, it is not a scenario I would like to see in the US.
There is a moderately-sized (maybe even more than a slight majority) that would be fine with letting people literally die in the streets if it mean their taxes were greatly reduced in the U.S.
I think most of that majority would not begrudge being forced to give a small % towards teaching a man to fish they just dont want to be forced to share their catch on a daily basis.
SS would be fine, if you could find honest people to manage it properly rather than the govt or bruce's pals at wall st.
"Without some form of forced retirement and health set asides, there are going to be people literally dying in the streets. Having lived in countries with this type of situation, it is not a scenario I would like to see in the US. "
You are going to see it anyway - once the dollar collapses due to runaway deficit spending and overprinting, what do you think will happen? Fluffy clouds and unicorns?
Government intervention is always counterproductive - SS has taught people not to save for their retirement, the government will take care of you. Ditto for Medicare, Medicaid, Food stamps, welfare and every other entitlement program created so far.
The sad part is, when it crashes, people will not riot because "my government misled me into abandoning my personal responsibility". They will riot because "they cut my food stamps!". Ignorance as an operating system always ends badly.
"SS has taught people not to save for their retirement"
LOL.
"SS has taught people not to save for their retirement"
Which in turn boomed the consumerist economy. Short sighted thinking to be sure, but the economic benefit of eliminating SS as Bruce suggested is probably non-existant.
But it's more equitable and more compassionate to force everybody to starve at once when the Ponzi collapses rather than to see starvation amongst a few people on the fringe who are not only lazy but also so repulsive to their fellow man that no one will voluntarily give them a hand. Have a heart.
When everyone is dirt poor, no one will be dirt poor.
I have long argued (20 years) for the opt out option. I was even willing to pay 50% of typical FICA and not take any benefits. I knew this day was coming -- and I will end up with not benefits. Soc Sec will be WELFARE FOR THE ELDERLY (means tested = welfare). But the opt out would wreak the ponzi scheme they've got going (and it is no doubt a ponzi scheme).
But BHO said this week Soc Sec is structurally sound. He is delusional.
More importantly, they want to keep as many people tethered to the federal government in as many ways as possible (health care is coming). Government controlled health care and retirement -- they got you where they want you. Requiring personal responsibility does not fit anywhere in government goals.
And BHO hastened the demise of Soc Security with his 2% cut in FICA taxes. But AARP did not complain -- they love BHO.
SS needs changing to maintain today's benefits, but it IS structurally sound. With no changes at all, 70% of benefits are guaranteed for at least 75 years, the actuarial limit under existing law. We can get to 100% simply by extending the retirement age another couple of years and increasing the wage cap to $150k.
So, a "lock box" full of worthless treasuries are your certainty of security? ???????????????
70% of benefits are guaranteed for at least 75 years
ROFLMAO!! So give you a dollar today, so you can give me 70 cents back when I retire? Can you possibly make a better case for keeping this peice of shit program going? What a joke.
Ah ha ha ha! I bet you couldn't even keep a straight face while typing this BS. WTF you think "structurally sound" means anyway?
70% is structurally sound apparently..... Another BHO vote.
SS is a bad deal for most people!? I'm stunned... I need to go lie down.
CBO is the new Captain Obvious.
Peter Ferrara started writing about what a bad deal SocSec is in 1980.
What the Depublicrat mainstream labels 'extremist' criticism of Soc Sec is now the conventional wisdom of the CBO.
Loot the reserves, 'invest' what's left in nonmarketable bonds, sacrifice about 300 bips of annual return compared to a balanced portfolio, and ... nobody earns any real return. Brilliant!
Thanks for bringing the CBO link to our attention, Bruce.
And thank you, Franklin Fuckwad Roosevelt, for saddling us with this POS program that 'nobody can take away from us.'
Yeah, but it bought untold millions of votes. Pay the chumps hundreds of their own money, steal millions. There are consequences for not watching the thieves. These stupid cock-sucker recipients think they are the ones getting over. No one gets over on the designer of the system. Rules make a scam a system.
Never give a sucker an even break!
~WC Fields
What does it mean when SS was designed such that the majority of contributors had to be dead three years before they could collect? Of course, in Chicago, that is not a problem.
The article shouldn't assume that the opt-out would increase consumption. Those who opt-out would be more sophisticated, and would be directing that additional income toward saving for retirement (or planning for the collapse, but you get the idea).
In theory, increased savings creates increased investments. Increased investments means economic expansion. An expanding economy produces more jobs, and generates taxes.
So an increase savings rate would have beneficial consequences. In theory...
Slight variation. Savers demonstrate a reluctance to part with cash which (if not due to deflation) indicates caution and evidence of a functional brain in a risky world.
When such people choose to invest savings, they are likely to do so in a more intelligent way meaning that more worthy projects get funded (productive investment rather than Ponzi investment). The consequence of high quality investment is healthy economic expansion (real) whereas the consequence of Ponzi investment is hot-air expansion, bubbles that eventually pop and reveal no organic economic strength to fall back on.
What I'm getting at is that a savings psychology becoming dominant likely doesn't lead to more net investment, but what investment exists will be more sound. Quality not quantity, and that's the key to healthy economic activity.
One should be careful to differentiate between hoarding and saving though. Hoarding (excessive saving) does not benefit an economy, it stifles it as even worthy projects struggle to find investors. Intelligent investment by many savers is the goal.
What we actually have is unintelligent borrowing to make unintelligent investments and, what I find most disturbing of all, increasing centralization of investment decisions. Furthermore, investment decisions are being centralized to fewer brains and those brains belong to people with no skin in the game (government treasurers). Misallocation of resources and economic harm are the guaranteed results.
TL;DR: interest rates are far too low and income inequality is far too high.
Stuffing cash into a mattress is not the only way to prepare for retirement. One could invest in one's own business which if run efficiently would profit the owner, the workers, the customers and the suppliers. One could also prepare for retirement by paying for the education of children in high paying fields and waiting for an eventual pay back. This can also be a boon to the economy and society.
You have it backwards (over the long run). Saving is required for increases in production (think innovation, not just more goods produced). This is the only sustainable way to grow an economy. The real-world issue is that rather than save, people would more likey buy more crap that they don't need. There would be no real, sustainable boost to the economy over the long run...just a lot more shitty iphones in the landfills.
You can "save" social security by creating incentives not only for younger workers to opt out but to incentivize others in multiple ways to defer or decline participation.
For example; maybe you give wealthier retirees the option to direct their credits to a child's social security "account". Maybe you give some kind of estate tax credit for deferal or not collecting SS payments.
You could devise all kinds of incentives to move more people towards INDIVIDUAL RESPONSIBILITY for their retirement while maintaining a degree of "insurance" aspect to social security. Of course this would have to begin by telling the public the truth, that social security is not only an ongoing fraud but was never designed to be a sole retirement income program.
It will become means tested. The only question is whether those who will be screwed will be given any consideration for the fact that the "promise" was a political lie from the day FDR proposed SS.
Bruce, if you let people opt out of a ponzi scheme the ponzi scheme fails. This ship can't be turned, even talking about correcting SS is a death sentence in politics. The rot has set in, all that can be done is let the house collapse to the foundation and see what is left. There can be no reform since old people vote, and there is no more powerful voting block then those getting SS and those slated to get SS in a few years.
I fully expect a means test as a stop gap, but the bleeding can't be stopped at this point.
+1 I think it was a Ponzi Scheme but at least it didn't take any government money to fund it like obamacare will. They can't fix this they owe the fund too much money and where would they borrow it from they have already monetized over 60% of our debt. I wish they would give me my money we've paid in over a half million dollars and we won't get it all back I would like to leave it to my children. Social Security was set up before the Boomer's who are now starting to retire were born BTW and they were forced to pay in. They left this borrowing from the Fund go on too long now though so they are really stuck the only thing they could do is repudiate the debt but the Constitution say's
Sect. 4 of the 14th Amendment. It reads in part:
”… .the validity of the public debt of the United States, authorized by law… shall not be questioned”
A prior ruling by the Supreme Court albeit on an unrelated issue appears to back this up.
And second, there is this Criminal Mischief statute
18 US 1361. Government property or contracts
“Whoever willfully injures or commits any depredation against any property of the United States, or of any department or agency thereof, or any property which has been or is being manufactured or constructed for the United States, or any department or agency thereof, or attempts to commit any of the foregoing offenses, shall be punished as follows:
If the damage or attempted damage to such property exceeds the sum of $1,000, by a fine under this title or imprisonment for not more than ten years, or both; if the damage or attempted damage to such property does not exceed the sum of $1,000, by a fine under this title or by imprisonment for not more than one year, or both.”
Now let’s look at how that $2.7 trillion Social Security surplus arose. In 1983, President Ronald Reagan sponsored an increase in Social Security taxes, changing the program from pay-as-you-go to collecting much more taxes than it paid in benefits. The idea was to have the Boomers prepay part of their old age benefits
Since we can't Default unless they did it on purpose which they won't since Politico's love the power and debt is slavery the only options left is to dismantle it for future generations or to tweak it. My bet would be on the former though I would personally prefer they just gave me my lump sum.
There is a way to game the system.
This is what I did... Pay into the system for the minimum required forty quarters, early in your working life. Work grey market from then on. Pay nothing more into the system.
Marry a non-US woman, who has never worked in the US. Apply for a SS account for her, when you retire and receive two pensions - your entitlement and hers, which will be 50% of yours.
First year's payments exceed total contributions.
I did not plan this but it is the way it worked.
This is precisely why this piece of shit is TU so soon. Politicians enhancing the goodies and never taxing to "pay for it" or They would never have won re-election if they taxed for what they were/are giving away. So, the old bastards got to spend it, make themselves and friends wealthy and enjoyed the power. As always, the inattentive, ignorant fucks that slave away aren't in on the joke.
Never wise up a chump!
~WC Fields
I should add that I do not need the monthly eagle shit (I had to explain to my wife the definition of eagle shit) and I actually feel sullied to receive it. Every month I donate the entire sum to NGOs, which oppose the policies of USGov - my version of justice.
Great strategy. I'm going to see if my wife will go along with that one. I'll point out how much help she'll get with domestic chores.
But this is wrong: "The risk of an opt-out is that 25-30 years from now those who did opt-out end up with no savings and become a burden to society."
No, Bruce. They opted out, remember? So if they decline SS AND decline to save for retirement, they become a burden to their family. Or starve.
This is how the world worked for 1000's of years, but people are such d-bags today that it wouldn't work in practice. Didn't you know? They even changed the ending to the Ant and the Grasshopper to teach people that if you spend your productive time goofing off, someone will save you...
Pre emptive strike:
http://www.fedsmith.com/2011/09/30/looting-social-security-pretaxing-baby-boomers/
How is this news?
SS is just another tax. Just don't call it a tax 'cos that gets the muppets riled...
Bad deal now? Wait until it is means tested, along with Medicare. Coming sooner than you think. Negative cash flow is death on a Ponzi. Ask Bernie Madoff.
At 43, I would settle for 20 cents on the dollar today. What they will do to all of us is criminal since a combination of means testing, inflation, extending the retirement age = theft. At least I don't expect to collect because this ponzi scheme won't make it another 25 years.
Im 43 too. I'd let them have everything I have ever put into SS, if I can keep the rest going forward. I'll take care of myself. Owning my own business, I pay double to boot. I'll never see anything remotely close to what I have put into the system. The only way will be, if they make me work longer--possibly until I die--or they inflate, in which case I'll get what I paid in, but it won't come close to having the purchasing power of the dollars that I put into it over my lifetime.
WORST INVESTMENT EVER.
I forward this to some folks at SSA and CBO.
Hey Bruce, forward the whole thing - article, comments and all - give them a chance to see how badly they're failing.
The CBO and SS read my stuff. I'm not sure the read all the comments. So I collect a few interesting ones, and send them along.
b
And would provide great cover to nationalize and or tax 401ks and other retirement accounts. You know to spread the wealth around because people are suffering...
I have learned a lesson over the past few years; if it's not 100% under my control, its not really mine.
Which is why I will never contribute to a 401k again. Go stuff the matching funds and tax benefits. I am in the process of cashing out what I have right now because I am changing jobs. The new job does not mandate contributions, so I will be making none. The government will have nothing to take from me but taxes.
I will have to make up for that by being diligent about saving for retirement. However, right now my goal is paying off 100% of all my debts. Shrinking the money supply, doing my part to roll this bitch over! I plan to own my assets outright and will pay cash for everything going forward.
Long term I am considering various assets to park my money in, including rental properties (potentially in another country), a small business, PMs, and things like that. I am considering starting a corp and keeping my assets there. I might eventually acquire some stocks if the market cleans itself up, but generally I am going to avoid fiat instruments.
I am not sure retirement is going to be an option for me, so I might as well find work I like with people I enjoy being around.
Oh, and I would take the opt out in a heart beat. Part of something is better than all of nothing; which is what I am going to get from SS.
Regards,
Cooter
The small business is probably the most practable. Consider what the Gov't imposes a 95% on PMs? You small business must be able to thrive in an depressed economy with high inflation, and unrelible infrastructure (ie daily rolling blackouts, irregular transportation, unrelable deliveries of goods, etc). Look at Greece, Zimbabwe for businesses that will work in extreme crisises.
The other option is to become self-reliant for your critical needs (food, water and shelter) and just wait the crisis out. That's assumping that civilization does go out with a bang through global nuclear warfare.
In my opinion Rental properties are a poor choice: You still need to pay for maintanence, property taxes, and general upkeep. Tenants can be a pain, and if they decide to stop paying, they can seek the court to prevent you from evicting them. Plus there is also concerns about rent price controls. Many large cities already have them. When inflation gets out of hand the first thing politicians do is impose price controls, including rent prices. I also doubt that real estate prices and stock prices will keep up with inflation. Prices will rise for real estate and stocks, but probably won't keep up with the cost of living (higher taxes, food and energy, etc).
FWIW: I too abandon contributions to retirement plans back in 2001. But I have been saving most of my income. I just pay the taxes now before they gov't starts piling on a bunch of new taxes. Taxes aren't going to get any lower in the future.
"I am not sure retirement is going to be an option for me, so I might as well find work I like with people I enjoy being around." The best option is to have a business with employees doing the bulk of the work for you. As you get older it will become more difficult to do everything yourself.