by Dale Coberly
The Fundamental Truth
If you don’t understand this, you don’t understand Social Security. If you do understand it, all the rest is minor technical detail… or utter nonsense.
Social Security is not welfare. Social Security is not an investment plan. Social Security is insurance… to avoid welfare if your investment plan doesn’t work out as well as you hope.
Because of the complexity of the modern economy Social Security is insurance that is needed more often than not. It does what the family used to do under the guidance of “Honor your father and your mother.”
But even there you have to understand that while “you” helped out your parents in their old age, they “paid for” that help, first by paying for their own parents in their turn; and second, by paying for you when you were very young; and third, by building the “infrastructure” that made it easier for you when it came your turn to work for a living.
There is nothing about Social Security that guarantees you will always have higher benefits than your parents, or pay lower “taxes.” The world changes. There are fat years and lean years.
What Social Security does do is guarantee that even in the lean years you can “save enough” for your own old age, by the miracle of pay as you go… paying for your parents old age… which they paid for in their turn.
I hope you can understand the dual nature of “paying for.” It is actually the normal way money works.
When you put money in any investment, or Social Security, your money “pays for” whatever the bank or the company you invested in uses it for in that day. What you get is a claim on “your money” when you ask for it back. Some claims are more secure than others.
You have NO guarantee you will get your money back from a stock. You have some guarantee… because of government insurance… that you will get it back from a bank. With Social Security you get the best guarantee so far devised by man…you get your money back unless you let your elected representatives steal it from you. And because it’s pay as you go, you get back “real dollars.” Inflation is taken care of automatically, and if the economy grows, you get an effective compound interest equal to that growth.
Even if the economy declined 50% and we had to live on half of what we earn today, we would still need to set aside about 10% of that in order to have enough to live on when we were too old to work. If you don’t think you can do that, you need to think harder. Half the people in America are already doing it… living on half what you make and saving for their retirement thanks to Social Security.
In those very bad times that no one is currently predicting, SS would handle it the way societies have handled bad times since the beginning of human societies. We’d all have a little less, and we’d share that with the old folks.
The Trustees currently predict a “worse” economy in which the Social Security benefits would need to be reduced about 25%. It turns out this level of benefits would still be higher on a monthly basis, in “real value,” than today’s. It also turns out that the reason for the reduction is that future generations are expected to live longer than past generations, so you get that “reduced benefit” for many more months… adding up to the same thing in the end.
But it also turns out that those future generations, even under the “bad” predictions, will be earning more than twice what we are… in real dollars. That means they could raise their own payroll tax by two or four percent, keep the present benefit rate… also about twice the value of today’s in real dollars… AND have more than twice as much money after paying the tax as they have today.
But that’s the good news. If the economy really did go bad you would still need to save for your retirement. And Social Security is the ONLY way you can do that safe from inflation… and the bad economy.
Instead, what we have today is as if we were on an ocean liner and every time the wind blows from the north, the captain and crew start running around the poop deck screaming, “If this keeps up the ocean will freeze over. We’ve got to lighten ship. Start throwing the passengers overboard. Now.
The Big Liars… and that seems to include everyone in Washington… are telling us that we have to cut off our heads today in order to save the cost of dinner twenty years from now.
You need to be smarter than that.