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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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The sweet spot for rentals is college kids. You get those fuckers to sign a 6-month lease, and pay full 6-month term up front. Most of the time it's just student loan $$ so they don't care. Actually, you sell it to them that it helps them budget better not having to worry about coming up with rent every month.
SS website says I get 2,010 per month in a few years...if I don't get it ....well lets just say....
"SS website says I get 2,010 per month in a few years..."
I am sure you'll get every penny, but paid in Bernanke Dollars. Just as during the last years of the soviet union, retirees received their monthly pension checks. Unfortunately for them, the currency became worthless so that a monthly check could not buy a loaf of bread.
Bernanke promises QE will lead to full employment. This is true. Eventually the US dollar will collapse and everyone will be forced to take a job or starve.
Yeah, they tell me I get something like that too. What would be nice would be a projection of what it will buy when I start getting it, like a couple loaves of bread and a tin of Spam (if I am lucky).
I recently started collecting CPP, the Canadian equivalent of SS. I get $121.58 a month. In 1971 when I started contributing that was about a week's pay.
I bet the checks look exactly the same as Social Security checks, they just have a little red maple leaf somewhere on them, right?
;-)
"they just have a little red maple leaf somewhere on them, ehh?"
Now you don't sound like a newfie! ;)
It's so simple Bruce... The opt-outers become Soylent Green...
http://www.youtube.com/watch?v=9IKVj4l5GU4
I'm sure you could come up with some tasty recipes Bruce.
All younger heavy mokers, drinkers and obeses should immediately take the opt out offer....do the death math and make the winning bet.
Auto insurance is such a terrible deal. I keep paying premiums and I get nothing back. I never will, because I'm certain I'll never have an accident.
Ditto for health insurance. Why should I pay for all the people who get cancer or old people? I don't have cancer and I'm not old.
IT'S ALL JUST A GYP!!!!!!!!!!!!!!!!!!!!!!!!
I WANT THAT MONEY BACK SO I CAN BUY THAT KOOL MOUNTAIN BIKE I SAW AT THE MALL!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
I just want to apologize to all the mountain bikers out there. You can cancel your health insurance and buy that bike. I don't mind. Mitt has reserved a place in the Emergency room for you.
Obama 2012?
Nice ad hominem.
Ron Paul 2012.
Ron Paul wanted to let young folks opt out of SS.
Ron didn't want to completely dismantle SS.
But if you enact the major parts of Ron's platform: end the FED and end the warfare/welfare state then the rest pretty much takes care of itself.
Patently untrue. Clearly, you do not know much about Ron Paul or his political stands.
While he has not called for the immediate end to the Social (In)Security System, he has many times, over many years, expressed the belief that those under 40 or so should be allowed to opt-out of SS, with those above that age continuing to receive benefits until the system eventually dies from lack of participants. So that would be a long, slow phasing-out rather than a sudden dismantling, but Ron Paul has made it very clear that he supports and advocates the eventual demise of the SS Ponzi System.
Like I said, RP does not advocate completely dismantling SS.
"Paul's 2013 budget proposal would guarantee to uphold Social Security commitments to older workers while allowing Americans under 25 to opt out of participating in the program."
https://en.wikipedia.org/wiki/Political_positions_of_Ron_Paul#Social_Sec...
BTW Ron's collecting his SS check. And I suspect that Ron would have you paying in.
Bicycle Repairman, you are a disingenuous and flat-out liar.
YES HE DOES! In no uncertain terms! He merely would pragmatically, and humanely, phase it out over a period of years or decades, until those currently reliant on it have died off. You are completely dishonest, or clueless about Ron Paul, if you do not know or acknowledge that fact.
akak, you're pretty dense. Well here are some real world facts:
1. Ron is collecting SS.
2. Ron says you should pay.
3. You are and will be paying.
4. Ron is not sure you'll get a check like he is.
5. You'll have to put that mountain bike on lay-away.
OK, buddy?
Bicycle Repairman, I have not a clue what all that gibberish was supposed to mean, but as you refused to clearly and logically answer my point, I can only conclude that your bluster is an attempt to cover-up your ignorance and/or deliberate obfuscation.
Why are you trying to deny and misrepresent Ron Paul's long-term goal to abolish the Social Security program?
I presented Ron's policy statement on SS. His words. Parse them anyway you like. He doesn't call for an immediate cessation of the program. It is a phase out over 60+ years.
Ron doesn't discuss where the funds lost from opt-outers will come from to pay the benefits for those 26 and over. So we have to guess. I suspect some of it will come from income taxes paid by opt-outers. The rest from everyone else's income taxes. Oops!!
Bottom line though, you're paying. No need for you to understand that. The deduction is automatic.
So Ron talks in bullet points and prefaces his statements with the phrase "Ron says...?" I've never seen him do that.
Ron Paul does envision an end to SS but he is a compassionate man with low time preference. He wouldn't let the folks who have been strung along by SS cheerleaders such as yourself starve. As Ron has said SS would be phased out over several decades with less burden placed on young workers.
I don't need SS personally. It only provides a pittance, something I recognized a long time ago. Nobody strings me along.
I said you were stringing others along.
Accident and health insurance pay out a specified value when one has an accident or medical issue. Retirement insurance is supposed to do the same when one retires but if Bruce is correct then retirees will not receive the specified, scheduled amount. See the difference? And unlike privately purchased insurance which one can opt out of if things are not as advertised one has no such opportunity with social security. See the difference again?
"Accident and health insurance pay out a specified value when one has an accident or medical issue."
Not in all cases.
"Retirement insurance is supposed to do the same when one retires"
No it isn't. The scheduled amount for SS changes all the time. And the same is true for variable annuities.
"but if Bruce is correct then retirees will not receive the specified, scheduled amount."
What Bruce knows about the politics and economics of SS could fit in the navel of a flea.
"And unlike privately purchased insurance which one can opt out of if things are not as advertised one has no such opportunity with social security."
Try opting out of auto, homeowners, health or business-owners insurance and let me know how it goes.
BTW if you think that private life insurers cannot go bankrupt and give you 50 cents on the dollar, then you need to review the recipients of funding from the TARP program.
So when I pointed out that one can stop transacting with private insurers who fail in their obligations you took that to mean that I believe private insurers never fail in their obligations? Having a choice about the most important things in your own life is not frightening. What is frightening is being forced into the same boat with people who believe that politicians like Obama and Romney are going to look out for your best interests when you are most vulnerable.
As I said:
Try opting out of auto, homeowners, health or business-owners insurance and let me know how it goes.
You get forced into a lot of boats by different entities.
"What is frightening is being forced into the same boat with people who believe that politicians like Obama and Romney are going to look out for your best interests when you are most vulnerable."
Those 'people' include most of your fellow Americans. Do you hate America?
I recommend savings in addition SS for the easily frightened.
Done
Moot
Done
Done
Somehow, I am magically still alive and kicking.
If you don't own a car, house or business, yes, you can opt out. And congratulations on your success in life.
Do you define success by how much a person can be sucked into supporting the lifestyle of "insurance professionals" such as yourself?
Why present a false dilemma? One can change one's insurer based on due diligence and not be forced to forgo purchasing insurance entirely. And how can you hate freedom of choice and still claim to love America?
The due diligence you refer to cannot be done with any reasonable level of certainty. I've "done it" for a living.
Again check out the life insurers who took TARP funding. If I told you in 2005 that they would need it, you would have said I was crazy.
If insurers were not regulated (protected) by government then individuals could set up their own transparent co-operatives. Stop trying to justify government interference based on the failure of the current corrupt, regulated system.
"then individuals could set up their own transparent co-operatives"
The US has lots of self-insurers and coops now. Nothing to stop you from forming one. What do you think a mutual insurance company is?
Look, face the facts. You don't know a fucking thing about the subject. If you could feel embarrassment, you would be embarrassed.
I know that if I went out tomorrow morning and started collecting cash from friends and neighbors who trust and support each other in order to provide a private safety net that I would get smacked down by regulators and tax collectors. Don't embarrass yourself further by pretending that that isn't true.
There are some regulations that you would have to follow. They're not so onerous and you wouldn't get "smacked down". The problem is that your scheme would fail spectacularly. Then you would get "smacked down".
For anyone following along, I've studied and applied insurance law. I've created insurance vehicles. "CrockettAlmanac" hasn't.
So why would a transparent, nonprofit insurance co-op between like minded people be bound to fail in your opinion? Could it be that as an "insurance professional" you wouldn't be able to baffle folks with bullshit and screw them coming and going?
My favorite part of this is when the government tells people they will only be able to pay out about 75 cents on the dollar after about the year 2030 or something like that. BWAAAHAHAHAHAHAHAHAHAHHAHAHAHAHAHAHAHAHAHAHAHAHAHAHAH!!!!
Give them a dollar today, so they can give you back 75 cents in 18 years? The joke is ON US!!
"Give them a dollar today, so they can give you back 75 cents in 18 years? The joke is ON US!!"
It gets better. 75 cents in a depreciating currency.
How can this be a bad deal, Bruce??? The politicos tell us this is a benefit cherished by all Americans, a vital part of the safety net between us and certain doom. How can this be a bad deal?
/sarc