Saturday, July 2, 2011

Rethinking Social Security

At the risk of losing my left wing credentials I heard right wing criticism of Social Security recently that seems to make a bit of sense to me. I'm shocked frankly that my source is speaking what appears to be truth, but maybe that happens sometimes.

So I'm listening to Christian radio and it's Dave Ramsey. I know he espouses standard Republican talking points on economics. He's done it before. So he takes a written question from a listener that wants his opinion on Social Security.

"Apic Fayle" says Dave in his southern accent. All right, let's hear it. "If you took the money placed in Social Security and just put in in a jar under your bed you'd get a higher payout in your retirement than you do with the current system. Or put it this way. Let's say the government let you keep 2% of the contributions. We contribute 15% today, so let them keep the 13% and squander it like government tends to do. You just get the 2%. If you invested that money and got the kind of return that is pretty typical you'd get more money from that tiny savings than you would when you retire from Social Security. What a piece of crap system."

He went on to criticize Norway and Sweden and talk about how socialism generally sucks. That was all BS. But leaving that aside I knew how I'd title my next blog post. "A Series of Lies from Dave Ramsey". I'm going to do something nobody presently listening to this station has ever done. Something nobody listening to right wing radio ever does. I'm going to look it up. I'll put my findings here and once again encourage right wingers to stop being so stupid and gullible.

I got home and went to They have a bunch of financial calculators. It's a pretty useful website. Here's a calculator for estimating your Social Security benefits and here's a calculator for estimating retirement income from savings.

In both cases I start the contributions at age 22 and end at 67 (full retirement age). I take something close to the median family income ($50K). A 2% savings is $1000 per year. I assumed a 10% rate of return, which is maybe a bit aggressive, but let's give Dave the benefit of the doubt. Also 30 years of income.

What I get is SS pays out $86K/yr or $7166/mo. Savings? $7852. What the? And this is assuming married, which produces a larger Social Security payout. First of all I heard this on Christian radio. Second it's from a right winger. Third it's kind of sensational. I'm shocked. It looks like he's right.

What about this claim that if you just put the money in a jar you'd be doing better. I can't quite reproduce that, even switching Social Security to unmarried. But it's not all that far off. The calculator doesn't allow me to put a 0% rate of return, so I just used 1%. SS unmarried pays $4790/mo. Savings is $2766. It's not totally out of the ball park. Maybe Dave is making some different assumptions.

I've heard a lot of bogus criticism of Social Security. The program is in dire straights, unable to meet obligations? Not really. There are much fewer workers for every retiree today? That's true, but nothing to be too concerned about. Government is inefficient at doing this kind of thing with their bureaucracy and waste. Not true.

Well this one seems kind of legit to me. It really doesn't pay out much when you consider how much you put in. What's going on fellow lefties?

Here's what is now clear to me. Social Security is not a savings plan. Savings takes advantage of compound interest rate returns. That's an extremely powerful force. Social Security isn't like that. It's a straight transfer of money from younger earners to the more elderly that are less able to earn money. Given that it can't enjoy growth like an investment how can it possibly compete with a real savings plan?

It was not a bad idea at the time. Think about what happened. The Great Depression wiped out people's savings. If you're young in 1929 you have problems. If you're old you have HUGE problems. You're on the street and maybe starving. So the government put a program forward. We're going to take some money from some younger people more capable of coping with the crisis and better able to make money and we're just going to give it to old people. But don't worry. You'll get it back. When you are old we'll do the same thing to the young people alive at the time. So you're saving a lot of old people's lives, but we'll get it back to you.

Kind of makes sense to me. Except for one thing. It's permanent. It's like we're paying for the Depression forever.

This is not a good way to save for retirement, right? Running the numbers at Dinkytown again I can see that if a guy made minimum wage his whole life (who's going to make minimum wage their whole life?) and got to save 15% of his income he'd still get in retirement the same amount someone making $50K today would get from Social Security. So obviously if the median income earner can save 15% he's going to live like a rock star.

But what that means is that people earning money today will not get their money right back as promised. They'll have to pay for the elderly today and maybe if you are kind of phasing out the program then they won't have the young people paying for them. But on the other hand with the phase out suppose they get to save 2%. And the phase out still pays them a reduced amount. They're actually making more than they would with Social Security alone. And yet future generations are saving 4% or 6%. And they get to be much better off. I hate to say it, but a phase out seems to make some sense in light of these things.


HispanicPundit said...

Few comments:

First, the administrative cost thing is such a pet peeve of mine. It just isn't a fair comparison. Remember, the average private company has to spend al ot of money on billing - social security, and also medicare btw, does that through the tax system. In other words, the administrative costs of the IRS have to be added to the administrative costs of Social-Security and Medicare. OR else it isn't fair. Then there is the issue of fraud. These government programs frankly don't spend a lot of time fighting that. But its a real issue. So you have to control for the different levels of fraud as well.

Second, the problems with social-security is deeper than just the horrible return. There is the fact that social-security - because of a double payroll tax - puts a real cost burden on labor, which harms especially those at the bottom of the economic ladder. Then there is the issue of savings - many people simply save less, because of social-security. But because social-security's return is so shitty, this results in a net savings loss for these citizens. Then there is the effect of this on minorities and the poor - because we die at a younger age, we 'benefit' less from social-security.

Third, social security is simply unfair. It's a transfer of wealth from the young to the old - regardless of need. Think about it: many of the young who are now paying social-security will not even make it to old age. They will die of health problems, car wrecks, crime, or whatever - in other words, the old already have an advantage over the young, they made it to old Age!

Then, there is the issue that the elderly, as a block, are the richest segment of socieity. And the young are the poorest. Yet social-security is a transfer from the young (poor) to the old (rich).

Jon said...

I'd have thought we'd have a few points of agreement here.

Chad said...

Just yet another example of what happens to something/anything that the government touches.

Article 1, Section 8 - only only only only only only only only please.

Every program that the government touches goes from a 'good' and 'decent idea' to a complete disaster in a couple decades. This goes for the Right and Left.

Want to solve our Political Garbage - any Politician who puts a plan on the table MUST be able to prove that it is Constitutionally sound to a panel of 5 Libs and 5 Conservatives (must have 6 votes) and it can not involve the word MANDATORY PARTICIPATION anywhere.

If a great plan is great it should be able to stand alone and not require everyone to participate.

HP is right about one thing that I always wonder about and it scares me just how crooked and wrong this is. This one scenario tells you all that you need to know about Social Security and how bad it is. What happens to a guy who dies at 64 years old to all of the money put into the pot? The guy contributed to Soc Sec for 46 years and died before he got 1 penny back so where in the hell did that money go? Wonder just how many people acutally die before they collect on Soc Sec, but have contributed all the way until there death and the program is still bankrupt - how crazy foolish is that.

Same example 46 years of contributions - how much would that guy have contributed if his average salary was $45,000 for the 35 years the guy worked - do we know what kind of number that is?

Please - Federal Over Lord's leave my money alone and let me plan for my retirement or let me at least spend my money while I am on this earth!!!

Anonymous said...

It is correct to assume that under ideal market conditions the yield would be much higher. The issue is that market conditions are never ideal. Second using $50,000 as an income estimate is not a good move because it ignores the lower end of the spectrum of incomes where people rightly use all of their income on routine expenses. The problem with Ramsey's argument simply stated is that it is not reality. Countries such as Chile that have tried this have been abysmal failures despite what the right wing pundits have said. Market fluctuations, private management fees, and the like have eaten into a huge chunk of that day dream number. SS is a pay as you go system that generally is quite solvent and serves an important social and economic function of being a baseline. It is consistent regardless of economic conditions and moderates market fluctuations. Granted the ideal retirement mix would have more risky investments that yield higher returns, however getting rid of SS and other defined benefit plans is a losing proposition.