The Straight Skinny on Social Security

Dave Raley

About two thousand years ago a man known to the Romans as Josuha-bar-Joseph said: "But lay up for yourselves treasures in heaven, where neither moth nor rust doth corrupt, and where thieves do not break through nor steal." Mankind was promised a reward in Heaven.

About sixty years ago a man known to the Democrats as FDR said: "But lay up for yourselves treasures in Washington, DC where neither moth nor rust are required for corruption, and where thieves do not need to break through to steal." (I confess that the foregoing was a paraphrase, quotation marks notwithstanding.) Heaven, we were assured, would now be on Earth.

Give the Roosevelt Democrats this much: Up until 1982 Social Security worked about as well as it was supposed to. Not that I wasn't complaining about it long before then. I complained when the combined rate was 4.46 percent and cut out at $4,200. I heard someone say that people my age would never get anything back and I believed it and said so.

Then I became philosophical. Grandpa was drawing Social Security. I was paying in a little. Daddy was paying in a little. My uncles were paying in a little. There wasn't a lot of difference in what we were paying as a group and what the Old Man was getting. If it wasn't for the system he would have been dependent on us and there were a couple of uncles who would not have chipped in if they had the choice. Practicality had overcome my sense of rightness.

Grandpa probably drew out in less than a year more than he and the steel plant had put in, even taking into account the interest the money could have reasonably earned and adjusting for the loss of value from inflation. That doesn't tell the whole story though. Of the cohort who had started with him at the beginning of the plan, less than half lived to draw anything at all or had survivors who drew anything at all. Grandpa was entitled to a portion of that, just as those who died would have been entitled to his had the situation been reversed. All things Considered, it took him, let's say two years, to get back all that he and his share of predecessors had put in plus interest etc.. He didn't retire until he was near seventy and he died at 73. From the foregoing we can see that Grandpa made a 50% profit from Social Security. It is doubtful that he could have invested the money safely and done as well. It is even more doubtful that he would have saved or invested any at all. He would have probably have worked until his health failed him and died a few months later. (or) Since he worked in a rod mill handling writhing white hot steel, limber as spaghetti, he accidently cut himself in two. Even so, I have no doubt that he would have "lived" longer working. But I digress.

In the years between Grandpa's death and Daddy's retirement I didn't give a whole lot of thought to Social Security. When it came up I could be depended upon to recite its flaws, always ending with: "of course I'll never get anything out of it." It was, to me, a tax to be paid. I couldn't do anything about it. If I wasn't paying it to this agency, another would be getting it.

Daddy retired at 62. He said he wanted to devote his full time to making life interesting for the deer of Cherokee County; and he did. He was astonished at the amount of Social Security he drew. It wasn't long before he had passed the break even point. When you hear people talking about those who draw excessively more than they have put into the system, they are talking about my Daddy. He was welcome to it as far as I am concerned. In a sense I and my brothers and sister were the true beneficiaries although I expect that we paid in more during that period than he drew. That's fine; we never had to put him through the indignity of becoming our "child".

Old Age and Survivors Insurance, that's the real name. As life insurance is designed to compensate your dependents if you die before your productivity is exhausted, Social Security is designed to compensate you if you live past your productivity. That was age 65 back in the 30's. In fact most people were dead by 65 back then. People live longer now, should the age be raised? Well it's already being scaled to 67 but if there is a substantial change be prepared for a wave of disability claims. Propped up with miracle drugs and modern machinery, today's 65 year old man gets around more and does more things, but aside from having better teeth he is nowhere nearly as sound as his 1930's counterpart. I'll come back to this later.

Social Security was in great shape when I first wrote this piece in 1999 but now as I update in 2011 it's starting to fray around the edges. The rest of the paragraph is my 1999 speculation: ".... but will I ever directly draw anything out of it? Probably. Will I make a profit? The rule of thumb1 is that you draw 40 percent of your average after tax working income. You can get a personalized estimate of your account. I sent off for mine and compared it to how I would have fared if I had saved and invested all that I put into FICA in the same way that I have saved and invested what little I have saved and invested, and then put the lump sum into a life annuity. If I start to draw at 65 and live to the average age as did my recent forbears, excluding one who died fairly young of an accident, there will be less than a dollar a month difference in what I could have had and what I will have. So I break even. That was before the recent increase in the FICA basis to $72,000. From now on only those who make at least $72,000 will draw the maximum benefit. If you make less, you have just had a cut in your future benefits. Somewhere, there is someone who will offer to show you with geometric precision that what I have just said isn't true, however, you may trust David in this matter."

Well it's 2011 now and the FICA basis is $106,800 and the income and outgo was about even last year. 2012 was supposed to be the year when collections would be less than distributions but the process has been sped up by a temporary cut in the rate. Ain't that something? The system is about to go negative so let's cut the rate. The Trust Fund is substantial but the debt to China is more. The plan back in 1999 was to pay down the General National Debt while increasing the Social Security Trust Fund so that the Trust Fund would be the major portion of the debt in, by one estimate, 2012. The philosophy behind this was that future generations couldn't renege on the bonds whereas they could demand a cut in pay as you go benefits. Human nature being what it is I'm not so sure the idea was so bad; if the General Debt had actually been paid down. What is happening is that you are paying in now and your children will pay the same bill when you line up for yours.

Will things be made better? Probably not. Things can be made worse and well meaning public servants are striving to do so. Might things be made better? Yes, but will it be allowed? No. Conservatives and Liberals, whatever those labels mean these days, are coming together about Means Testing. The Liberals like it because it will give those who put in the least a greater share and those who put in the most a lesser share. It doesn't occur to the Liberal that this will reduce the system to welfare status and bring about it's demise. The Conservatives readily grasped the concept and are counting on it.

The first "train wreck" date was supposed to be 2012 and the prediction was amazingly accurate. The amount coming in will be less than the amount going out. Wasn't that the excuse for over taxing in the past? If there was never be a time when the Trust Fund pays off, what was the rational basis for collecting it in the first place? The other "train wreck" is when the Trust Fund is depleted and the system is back to pay as you go. Best estimates put this around 2030.

Let's look ahead to 2030, and see what will happen if this, that or the other path is followed.

Scenario 1: Keep on the way we've been keeping on. In 2030 there will be two people of working age for every person of retirement age. These people will have to pay exorbitant FICA taxes.

Scenario 2: Stop spending the surplus FICA collections. The money is simply taken out of circulation and when it is needed put back into circulation. Problem: Since the Treasury takes the money out of circulation rather than issuing a bond for it, the money will earn no interest. A certain result is deflation. If you are debt free and have most of your assets in cash you may enjoy deflation. When the time comes to pay the money out, that is, put it back in circulation there will be inflation. In 2030 there will be two people of working age for every person of retirement age. These people will have to pay exorbitant FICA taxes as well as laboring under the yoke of massive inflation.

Scenario 3: Suppose by some providence the General Debt is paid down to nothing and the Social Security Trust Fund is adequate to handle future benefits without raising future FICA taxes. For the money to be paid out the bonds will have to be redeemed with current taxes or borrowing from other sources. In 2030 there will be two people of working age for every person of retirement age. These people will have to pay into FICA as well as paying off the bonds.

Scenario 4: Cut FICA taxes today to make the program a pay as you go system again. Pay off the National Debt while you're at it. Maybe raise Income Taxes by the same amount FICA is cut. Sounds bad but is at least honest. In 2030 there will be two people of working age for every person of retirement age. These people will have to pay whatever FICA is required to fulfill the Social Security Contract.

Scenario 5: Privatize. Rather than go through all the privatization schemes that I have heard let me drag out the magic wand and convert everyone's Social Security account into a diversified stock portfolio that, as of today, will, through a combination of dividends and divestment, pay out twice the present Social Security benefit to those who retire today. Those who retire next week will need to put in a little more, next month a little more still and so on. This will be great for the near term for there will be more buyers than sellers. What happens when there are more sellers than buyers? Who will buy the products of industry so that the industry can make a profit and pay dividends? Who will buy the stock that is divested? In 2030 there will be two people of working age for every person of retirement age. These people will have to buy the merchandise as well as the stock. What if they can't afford the goods and don't want the stock? Guess what! Private investments are recovering, right now, for the same reason that Social Security is solvent, right now. More money is going in than is coming out.

The Social Security "problem"is not so much of a problem in and of itself as it is an indication of a far greater problem. The canary in the mine, so to speak. There is nothing new in the notion that those who work must produce enough for both themselves and those who don't work. The problem is the balance; too many people unable to work who must be supported by those who can work. The pyramid has become a truncheon. Life itself is the real Ponzi scheme.

All of the panic is based in the notion that things will continue as they are now headed. The "Boomer Bulge" as a group will live as long as the "Pre War" generation, and be as unable to work in their old age. Why should anyone assume this? There was a time when, if you had a weak constitution, you either didn't make it to viability or died as a child. To raise two or three children to adulthood a woman often had to produce five or six and suffer as many or more miscarriages. Then in the mid 30 there came medicine that actually worked. Pre-natal care that was effective. The weaklings, such as myself, began to survive instead of being culled. I had an excellent chance to die as a baby and again as a pre-teen. Modern medicine saved me. Will it save me again and again or am I gaining on it too fast? What about those who have even weaker constitutions than me? There are a lot of them. Modern medicine, effective as it is, is still, for the most part, reactive. It won't perform the same miracles on the future elderly as it does today's because they won't be as tough to start with. Unless there is a breakthrough in rejuvenation, my cohort, and to a greater extent the cohorts younger than me aren't going to be a that much of a burden.

If there is a breakthrough in rejuvenation? Give me another, healthier youth, a new set of natural teeth and 20-20 vision and keep my share of Social Security.

1. There is a movement to banish the phrase "rule of thumb" from polite literature on the grounds that it refers to some old law that gave a man the right to beat his wife as long as the stick was no larger than the diameter of his thumb. Actually, the phrase arises from the use of the thumb as an informal measurement. The Kings thumb was often the basis for the official inch and his foot for the foot. Alas, my own foot is only 10.5 thumbs which may account for my lack of success in politics.


Last Update: 12/14/10 ------- Web Author: David M. Raley, PE
Copyright 1999 by David M. Raley, PE - ALL RIGHTS RESERVED