Social Security For The Young

by Dale Coberly

Social Security For The Young

Intelligence Squared U.S. (corrected link: is sponsoring an Oxford-style debate Tuesday evening in Manhattan. The program is entitled “Grandma’s Benefits Imperil Junior’s Future” The resolution:

“Commitments made to seniors decades ago failed to foresee the harsh economic realities of the present. Do entitlements saddle our children with unmanageable debt, asking them to sacrifice their future for the sake of the elderly? Social Security, Medicare, and Medicaid were created to provide a social safety net. But if we cut these programs, are we balancing the budget on the backs of the aged and sick, leaving behind society’s most vulnerable?”

Arguing for the motion will be Fox “News” commentator Margaret Hoover and U.S. News and World Report editor-in-chief Mort Zuckerman.

Arguing against will be former DNC Chair and Vermont Gov. Howard Dean and Roosevelt Institute economist Jeff Madrick.

Does keeping promises to the elderly mean sacrificing our children’s future?

The answer is, “NO! This is nonsense. Social Security has NOTHING to do with balancing the budget.

But while you will hear the lies the enemies of Social Security have been telling for 75 years, it is not certain the defenders of Social Security will explain the simple truth.

The simple truth is that Social Security has nothing to do with “the harsh economic realities of the present” except to provide the insurance payments that people paid for “just in case” of harsh economic realities like the present.

Social Security is NOT in trouble. It is not broke. It is not going to go broke. It can’t ever go broke.

Unless you believe the lies and let them break it.

With NO CHANGES AT ALL Social Security can continue to pay “all” benefits forever at a level that is “enough” by today’s standards.

So why do we keep hearing that is going to go broke and create huge budget deficits… unless we raise huge taxes on the young… or “the rich”?

Well, because there are highly paid liars — they call them “non partisan experts” — who are paid to tell you this.

And you, dear reader, will have to think very hard to free yourself from the lies. They have been telling you lies since you were a child, charitably giving “lesson plans” to the schools, so that well meaning, but not very well informed, teachers would teach the lies to children too young to know they were being lied to. So you would grow up and every time you heard “Social Security.” you would think, “it won’t be there for me. it’s going broke.”

And even those people who partly know better can only say “it’s not going broke… not yet anyway.” or “it’s not going broke, it will be able to pay 80% of benefits… so it’s only 20% broke,” or “it’s not going broke… we can make the rich pay for it.”

Well, it’s not going broke at all. Not even one percent. Not ever. And it doesn’t need to be fixed. And the rich don’t have to pay for it.

In fact the whole point of Social Security is that it is NOT a tax on the rich. It is NOT welfare. It is not even “government spending.” It is the only way that workers have to save their own money for their own retirement protected from inflation and market losses. To secure your assets effectively, find out how Offshore Trusts Can Offer Asset Protection, providing comprehensive strategies for safeguarding wealth from various legal and financial risks.

Social Security is a very smart way to protect workers savings by a simple idea called “pay as you go with wage indexing.”

The way it works is something like this. [There are some details here that I have simplified to make the point easier to follow. They do not change the basic idea, or the “cost” to workers in any important way.]

When I was young I made a dollar an hour. If the payroll tax then was what it is today [it was a lot less] it would mean I paid about 6 cents an hour to Social Security, and my boss contributed another six cents. My 12 cents, times 2000 hours per year times about 100 million people [if the population was the same… it was a lot less] would add up to enough money to pay the retirement needs of about 50 million old people [there were a lot fewer]. Fifty years later, workers doing the same work I was doing are making about ten dollars an hour. So they contribute about $1.20 to their Social Security. That means that $1.20 times 2000 hours per year times 100 million people would be available to pay the retirement benefits of 50 million retirees. In other words, to pay my current Social Security benefits, there is ten times as much money available as i was paying in… with no change in the tax rate.

Some of this is “just” inflation, but enough of it is a real increase in wages over that time. This real increase in wages translates into a real effective “interest” on the money I paid into Social Security, allowing me to collect more than I paid in. Even the part that was “inflation” would have been hard for me to earn in interest over those fifty years.

Now it happens that over that time, the ratio of the number of beneficiaries to the number of workers has changed, but so has the tax rate. The ratio of workers to beneficiaries has gone from ten to one to about three to one. So the tax rate has gone from 2% to 6%. That is not a “terrible problem.” It merely reflects the gradual phasing in of Social Security. This meant that on a pay as you go basis the early worker-beneficiaries got a bargain. On the other hand, those early workers had supported their own parents and paid for welfare for others, lived through the depression and fought World War 2, and served in the draft, and built the infrastructure that makes it easier for you to make money than it was for them. But it does not mean that later worker-beneficiaries are bearing a cruel burden. They are paying in no more than they will get back. In fact they are paying less, because of that pay as you go effective interest we just talked about.

If there were no Social Security you would still have to save at least as much money as you now save via the payroll “tax.” Moreover you would have to earn at least enough interest to pay for inflation, and you would be lucky to earn enough interest to equal the effective interest that “wage adjustment” through Social Security provides you. You might do better than that. Or you might do a lot worse. Social Security is insurance to prevent you from doing worse. The “rate of return” is not bad, but that’s not the important point. The important point with insurance is the difference between “enough” and “not enough.” Social Security provides you with enough to retire if all else fails.

The hardest part of saving enough on your own would be actually saving the money in the first place. Most people can always find something more important today than saving money for tomorrow. And then tomorrow comes sooner than they expect. The second hardest part would be keeping up with inflation. And the third hard part would be not losing it all to a bad investment or just a bad decade on the stock market.

That’s basically how it works. No tricks. No magic. No anxious hopes. No “if only’s”. No greedy geezers. No taxes on the rich. No trips to the welfare office. Just you saving for your own basic retirement. There is no reason this can’t continue forever.

So why does “everybody know it’s going broke and it won’t be there for them”?

Because everybody has been lied to. You have been lied to your whole life, and you will have to work very hard to understand that. All the little lies will pop into your head saying, “No…it’s really a Ponzi scheme.” “no, it’s really greedy geezers,” “no. the return on investment is really lousy.” “no, the return on investment is really too generous.”

It’s not going broke. Ever. But here is why they get away with saying “it” is.

Back in 1983 there was some danger it COULD go broke. There was a lot of inflation and a lot of unemployment at the same time, and the Social Security tax rate had not been raised enough to pay for the benefits the workers would need. [it was 8%]. They fixed that problem then by raising the rate to 11.4%, scheduled to rise to 12.4%. But this rate was actually higher than needed to just pay for Social Security’s needs on a pay as you go basis. The extra was put into a Trust Fund — that means it was saved in a legal way so the money, and the interest it earned could only be used to pay for Social Security benefits. So in effect the Baby Boomers would be paying in advance for their own retirement needs above the normal pay as you go rate. This Trust Fund is exactly like a savings account you might set up to pay for your kid’s college. It grows until the kid goes to college, then it is draw down to pay for his expenses. And it runs out of money about the time he graduates. So the Social Security Trust Fund is expected to run out of money just about the time the Baby Boomers run out…. of a need for benefits.

It is this running out of the Trust Fund that the politicians and journalists point to and shout that “Social Security is going broke.” But the Trust Fund is NOT Social Security. It’s a bridge fund to help pay for the Boomer retirement. It is SUPPOSED to run out of money.

After that, Social Security goes back to “pay as you go with wage indexing.” And it can continue on that basis forever.

But there is one more little wrinkle in the story. While the Trust Fund is paying for the Boomer retirement, the “young” are going to be living longer than their grandparents did. If they are going to be living longer, they will need to save a little more for their retirement.

Or they can wait and not retire as soon as they might have wanted. Or they can retire on time and take a little less each month in order to make their savings last the longer time they will need it.

As a matter of fact, with no change at all, Social Security can pay for them to retire on time, and pay “all” benefits over their life expectancy at a monthly rate that would be considered “enough” by our standards today. But because the people of that time will be making about 60% more (real) money than we are today, they may want to retire at the same higher standard of living… that is keep the same monthly rate of benefits that people get today (which would be worth more than today’s). If they will want to do this… keep the same “replacement rate” and the same retirement age, they would need to raise their savings rate (payroll tax) about 2% for the worker and 2% for the employer. This will not be a hardship for them because they will be making 60% more than you are today. And the really good news is they don’t have to do this all at once. In fact it would be better if they raised it about a tenth of a percent per year over the next twenty years. They would never notice the increase… because their wages are going up. But they sure would notice having to put off their retirement, or having to live on a pension that was “enough” for their grandparents, but won’t buy what the people living in the same time and in the same neighborhood are going to “need.”

So Social Security cannot go broke. It can always pay “all” benefits. But you will have to defend it from the liars, and you will have to decide what tax rate you are willing to pay in order to get the level of benefits you will want at the age you will want to retire.

To put it simply, if you want to keep the same retirement age, and the same relative replacement rate you would need to raise your tax rate at least one half of one tenth of one percent per year… that’s forty cents per week in today’s terms.

Or you could take the chance of having to work for the boss until you are ready for the glue factory. Even if you don’t want to stop working when you are 65, or 62, you may like the idea of having your Social Security to back you up while you try to do something really worthwhile with the rest of your life.

But you are going to have to undo a lot of lies if you are going to save your Social Security for your own needs.

Small note on math:

The average worker is making 1000 dollars a week today; he is paying 60 dollars a week for his Social Security, and his boss is contributing a matching 60 dollars. This leaves him with 940 dollars a week to live on (and pay other taxes). The average SS beneficiary gets about 400 dollars a week.

In 2040 or so the average worker will be making about 1600 dollars a week. With no change in the payroll tax, he would pay 96 dollars a week into SS. his boss would match that. leaving him with 1504 per week to live on… The average beneficiary would get 640 per week…. IF he wasn’t going to live longer. To make the money last a life time that is about one third longer he would have to settle for 480 dollars per week.

Or he could have raised his payroll tax by 2%. then he would pay a tax of 128 dollars per week, and his boss would match that. leaving him 1472 per week to live on … And the average beneficiary would get that 640 per week without having to delay his retirement for years. Note the trade off. He gives up 32 dollars a week out of 1500 while he is working in order to gain 160 dollars a week out of about 500 while he is retired. And this doesn’t even count the gain that worker will get from the “effective interest” we talked about.

Look at those numbers. It’s hard for young people to really understand that they are going to get old, and they are not going to want to work until they are ready to die, or may not even be able to work. You are going to have 530 dollars more per week after tax than you have today even if you raise your own tax the 2% that would be enough to allow you to retire young enough to enjoy it, with enough money to live about the way your neighbors live… the way you lived before you retired.

This is not a crushing burden. It’s called being richer, and using some of your extra money to pay for a longer, happier retirement.

And it has NOTHING to do with the Federal budget. It’s you paying for your own retirement. IF you are smart enough to keep them from stealing it.