Any Social Security experts here?

I am not attacking the efficiency of the program itself, and I agree with everything you penned here. What I am somewhat facetiously saying is that, given the choice of paying into "social security" or keeping that money and being wholly responsible for my own retirement, I would have 10-20 times the benefits I would otherwise be eligible to receive from the government. If they did "secure" the trust fund and invested the monies wisely rather than issuing a bunch of long-term notes payables, that would be another partial solution to the problem, but the very misnomer "social security" quite clearly conveys its intended impact.

Another point regarding fairness is that the tax is a flat rate that only applies to about the first $90,000 of earned income. The government could very easily make the SS tax 1. apply to all earned income and/or 2. make the rate progressive or even 3. apply it to unearned income. While 2 and 3 are unlikely, 1 is probable some time in the future. So while the "rich" may get back a lower percentage in the future they are enjoying certain benefits now.

Actually, this is also a red herring and trotted out frequently and somewhat disingenuously to point out the "inequity" in the program. Social security already IS progressive in that the wealthy get a much smaller relative return for dollars invested. And this gap is only going to widen.

Not to mention that the federal tax code is quite progressive, so regardless of how you classify government expenditures and receipts, it doesn't change the fact that the affluent pay a much higher relative share of the taxes. The top 20% of income earners pay 80% of the taxes, and the top quintile is the only group whose EFFECTIVE rate has gone up recently, despite all of the allusions to their "access" to tax exempting vehicles and accountants. And by the way, the social security tax has already been increased 12 times since inception. As per usual, the government makes promises it can't deliver. We do not have a tax problem in the US. What we have is a spending problem.

Sagarin wrote:

Social security already IS progressive in that the wealthy get a much smaller relative return for dollars invested.

Can you show us the support for this please?

Um, in its most simple terms, if I make $90,000 a year (which is quite a bit of money) and pay a 6% tax while my employer pays the other 6%, I am still only entitled to roughly the same benefits as someone who only paid that 6% share on $45,000 per year. That's a HUGE difference over a 40-year time span. And why should I believe that the ss tax won't be raised again, making this disparity even greater?

As I said before, some combination of what you are proposing is going to happen. The social security tax probably will be raised yet again, tax-deferral and tax-exemption vehicles will likely be repealed for the "wealthy," and benefits will be cut severely or disappear for certain income groups.

The Bush administration has a solution, and it's an amnesty for 21 million immigrants who are illegally in this country. Once these people are legalized and paying into the system, the supposed gap will evaporate. Of course, hispanic immigrants are averaging more children per family, which will help. The government position is to grow our way out of the problem by increasing the population of young workers.

this is a tricky subject - the progressivity or lack thereof of social security taxes.

first, we have to decide whether to accept at face value the idea that social security taxes are different than general revenue taxes. as we have all agreed and acknowledged, for a long time now, much (or most?) of social security tax receipts have been used to fund general government activities. so if we reject the premise that SS taxes are different, then they are clearly regressive in nature (b/c they tax from dollar one and they are capped at $90 some k).

if we decide to accept at face value that SS taxes fund only SS, then the issue is still complex. when you compare a $90k earner to a $45k earner, i'm willing to accept without looking it up that the $45k earner makes out better. and i'm fairly certain that the $20k worker gets an even bigger payout relative to taxes paid in.

but what about the $500k earner with substantial capital gains? sure his payout is capped, but his SS taxes as a percentage of income are minimal. around 1% or so. isn't that regressive, regardless of the future payouts?

it's a complex program and i'm pleased and impressed with the level of the discussion here. it's too bad the more serious politicians can't get together in a room and hammer out a "fix" to buy us another 20-30 years. the range of possible solutions is sufficiently narrow that some compromise must be within reach.

kaitainen wrote:

but what about the $500k earner with substantial capital gains? sure his payout is capped, but his SS taxes as a percentage of income are minimal. around 1% or so. isn't that regressive, regardless of the future payouts?

kaitainen, this is a bit of a red herring as well. Surely you understand the original design and intent of social security. Furthermore, as you yourself have conceded, social security doesn't exist as a separate fund. The affluent pay the bulk of the taxes in society, period. One can argue that the bulk of the affluent are responsible for the bulk of the jobs created, but that is another issue altogether.

Sagarin, I disagree with your numbers that you only get ten cents on the dollar that is paid in SS taxes. I did a somewhat simple calculation using the SS benefit formula (http://www.ssa.gov/pubs/10070.html), and came up with the following:

Assumptions: Employee worked for 37 years, and became eligible for full SS retirement (age 66) in 2006. In his final 35 years, he made at least the taxable wage base.

Using the historical taxable wage bases from 2006 back to 1970, the total wage bases (so total wages in those 37 years subject to SS tax) is $1,724,300. Multiply those total wages by 12.4%, which represents the 6.2% that you and your employer each contribute. Total SS taxes paid in 37 years equals $213,813.

Based on those facts, the website's formula tells us that the monthly SS benefit for this person at age 66 is $2117.40. The life expectancy for a person age 66 is 20.2, according to the life expancy tables used for age 70-1/2 minimum distributions (not that that applies here, but I'm just trying to guess how long an average retiree receives SS benefits -- as runners, we'll all live longer than that, right?). If that person lives 20 more years, they would receive a total of $508,176, and that's not even including the cost of living adjustments that SS retirees receive.

So, for each dollar this person contributed, he would receive $2.37. As you've discussed, those who make less than the wage base do even better than that.

Before you criticize my numbers, I will note that, obviously, none of this takes the time value of money into account. However, your statement simply said that people only get back about ten cents on every dollar they put in, and would be lucky to get more than that. That simply isn't true.

I'd be happy to figure out what the rate of return on the taxes turns out to be using these facts. But that is another issue that I don't believe you were addressing.

Sagarin:

Regarding rate of return, using my facts above, the numbers result in a rate of return of 4.415%. Sure, you could do better in the market, but it doesn't seem horrible. Again, that will likely be better for people who don't make above the wage base their entire career (and for those who live longer than the average person).

Note that my calculations assume a cost of living adjustment of 2%. The rate of return is calculated by determining what rate of return would result in those contributions being made over thirty-seven years, and then distributed over twenty years of retirement (and resulting in a zero balance at death).

Let me know if you'd like to see the spreadsheet.

Dear Reader,

Social Security will be around for you, if you live long enough. The age you will have to be to qualify for payments will keep increasing, but it will still exist. How can I be so sure? It's a program that depends on the existence of people paying in to fund the benefits of the recipients. If the program were closed to new beneficiaries, such as an announcement in 2015 that the program would not pay benefits to those born after 1980, millions of people would stop paying in immediately and benefits would cease for the elderly in months. It would be the same as a huge run on banks and the Feds would be left with less money coming in and millions of elderly claimants for other social programs and lots of social upheaval. Once the Social Security program stopped having reserves big enough to return to people what they "paid in" and started paying the old with what the young were paying in, the program became one that will last till the end of time or anarchy. The government has to keep it alive for its own benefit.

Yes, this is counterintuitive if you have been saying to your friends for years, after a few beers, "Social Security won't be around by the time I'm 65." People agree without thinking about it. They will always be collecting from you, and they will keep the program alive enough so that you keep paying in. You just may not live long enough to collect. The math has already been done. Adjusting the eligibility date a month for every calendar year is plenty, and more than necessary. In other words, if elibility for on birth year is 67 years 10 months, the next birth year has to wait till 67 years 11 months. The program will be fine with less of an adjustment, such as delaying one more month every couple of birth years. Someone 25 now can expect benefits to begin around age 70. It's not a crisis, it's just a change and one that has changed less than the increase in longevity we have enjoyed.

By the way, you can also thank the millions of new workers coming across the border and having children. Those children will be paying into Social Security and you'll be getting your check. Both Democrats and Republicans don't stop that immigration because they are necessary to pay for boomer's Social Security, staff the military in 20 years, etc.

Rest easy, stop worrying. Keep running.

Napper wrote:

Before you criticize my numbers, I will note that, obviously, none of this takes the time value of money into account. However, your statement simply said that people only get back about ten cents on every dollar they put in, and would be lucky to get more than that. That simply isn't true.

Ah, time value of $ is a key consideration. I admire your effort here and I'll trust your assumptions. Remember, I did not say that a person receiving benefits today or a person receiving benefits tomorrow, if the structure and premise of social security are not changed, is getting a $0.10 return on each dollar contribution. What I am projecting is that in the interest of political expediency, groups in the upper income brackets in the future will be getting a substantially smaller return and a mere fraction of what they paid in. The $0.10 comment was for effect to make a point. It was never asserted as a factual number.

If you consider all risks inherent in any valuation assumption, such as the various risks of inflation, economic risk, the risk of the govenrment defaulting, etc., and, most importantly, the return that you would otherwise be getting on alternative and substitutable assets, as well as the time value of money as you pointed out, the returns are negative for some groups of payors. Not everyone is entitled to the same relative return. For some groups, it might be a good deal.

*affect

Sagarin wrote:

kaitainen, this is a bit of a red herring as well. Surely you understand the original design and intent of social security. Furthermore, as you yourself have conceded, social security doesn't exist as a separate fund. The affluent pay the bulk of the taxes in society, period. One can argue that the bulk of the affluent are responsible for the bulk of the jobs created, but that is another issue altogether.

i presented that scenario as one of several, to show how different comparisons lead to different conclusions about the progressivity of the program as a whole.

my big problem with the way that SS taxes have been used is that they have not been thought of or presented as a piece of a comprehensive federal tax system. rather, they are presented as a separate tax. if the former approach were taken, then we could think about the progressivity of the income tax along with the regressivity of the SS tax (ignoring potential future SS payouts for the time being). now, however, we have strange situations in which certain mid-income taxpayers, those making around, say, $85,000 (some may consider this high income, let's not get caught up in semantics) pay a higher percentage of their income in total federal income and payroll taxes than someone who makes, say, $115,000 or $125,000.

that doesn't make much sense and no rational person would build a tax system from scratch that had that result.

but as for your fundamental point, yes, high wage income earners pay the large bulk of federal taxes. taking payroll taxes (SS in particular) into account raises the percentage paid by lower and mid income people (who pay little or no federal income tax). nevertheless, your point remains true. note though, that it isn't true for those who receive their income through capital gains. they might pay a large dollar amount in taxes, if they are either bad at tax planning or if they require huge sums of money to maintain their lifestyle, but in general, their rate of tax will be lower than moderate income folks (15% rate vs. 12+% payroll tax rate + at least 15% income tax rate for those who make around $60k). i'm not sure what the solution is (a modification of the AMT perhaps to capture those who live solely on capital gains? raise the taxes on capital gains in general (i'm personally not a fan of this)?), but it seems unfair.

Sagarin wrote:

Actually, can you please provide the source of your information, because I believe YOUR statement to be incorrect. But in the off chance that your right, I would like to read a CREDIBLE source that offers that kind of guarantee.

The CBO data that was already posted is pretty much the same as where I got mine. I had a professor in college that was with the CBO and was part of the team that calculated the numbers that were posted in this thread.

Once again the $.75 return on the dollar is the worst case scenario for SS (low immigration rate, high rate of increasing life expectancy, etc.) with 90% or 95% confidence (I can\'t remember off the top of my head). Under the CBO\'s best case scenario, SS will get over the baby boomer hump without any reduction in benefits.

Since neither of these two scenarios are likely, obviously the likely benefits will fall somewhere inbetween.

Flagpole Willy wrote:

So, I'd like to get a Social Security thread going here. I'm admittedly not too knowledgeable about it

This is shocking. Willy admits to not knowing something. Someone remember this. It probaby won't happen again in our life times.

fmr wrote:

Sagarin wrote:

You may, if you're lucky, get $0.10 to the dollar of contribution, particularly given the government's negative REAL rate of return.

Incorrect. Anyone who is already contributing to social security will, at worst receive $0.75 on the dollar. That is assuming the very worst realistic outcomes for the determining factors that would affect social security payouts.

Yeah Sagarin, gonna have to agree with fmr here. No way people my age get just 10 cents on the dollar. 70 cents? 75 cents? Yeah maybe. Kind of why I've socked a ton away. I will be able to have a very nice retirement even without a dime from Social Security. I was just curious what people thought about it, that's all.

FW: as a conservative investor, do the following: live and save as if SS will evaporate before you get to use it.

Worst case scenario: you are RIGHT, i.e., Soc Sec goes away, at least for you (e.g., Fed institutes some means test; you have savings, ergo, you do not qualify).

Best case scenario, Fed hands you excess income--you can invest, donate, give your other money to your heirs, whatever.

Plan for retirement AS IF there will be no Soc Sec for YOU; why? Because, for a number of reasons, it might go away...

Remember, Soc Sec can be *voted* on...and the grasshoppers outnumber the ants by a factor of, what? 10 to 1? Better safe than sorry.