Archives For Social Security


I just spent the last few minutes reading Geoff Colvin and Allan Sloan’s piece in the latest issue of Fortune (sorry, no link available yet).

The article started out promising in that it made it sound as though they actually had a solution for the economy. Instead, I was disappointed because there is no solution, only generalities (much like politicians give us day in and day out).

What do I mean?

Well, they start out by talking about how bad everything is right now and about how childish Washington politicians are. I agree with that.

Then, they move on to address how they would fix certain parts of the economy. The first of those is spending.

Social Security and Medicare

Medicare first…

The biggest problem in dealing with Medicare is the endgame—when people enter their final descent and are kept alive, expensively, often with no statistically significant chance of leading what most people would consider a decent or rewarding life.

I agree with that. It’s very awkward to talk about elder care. Their solutions:

We propose that if you want to use heroic measures to keep yourself or any other Medicare or Medicaid recipient alive—we’ll leave it to experts to define “heroic measures”—either spend your own money or buy a supplemental end-of-life policy from the market that will doubtless spring up if our propsal is adopted.

Not sure I’m comfortable with “we’ll leave it to experts to define ‘heroic measures'” but I understand their point. At some point it’s time to let go.

I like this but wonder where they would draw the line:

We’d also surcharge smokers and the ultra-fat for their Medicare coverage.

Seems like we would eventually cross over into the nanny state. Smokers, ultra-fat, consumers of certain foods, etc. Seems scary to me.

They move on to talk about Social Security. This is where it starts getting vague.

The fixes are simple and obvious: Bring in more money by slightly adjusting the payroll tax, and change the benefit formula to reduce benefit growth over time to the highest-income beneficiaries. Social Security tax is levied only on salary income up to $110,100 (while Meidcare tax is levied on all salary income), and that wage base rises gradually over time. Let’s raise it a little faster while also edging up the reitrement age to keep pace with increasing life expectancies. That would do it.

Questions: How much? How fast? What age?

I won’t even get into why this idea of raising the income cap while lowering the benefit amount disgusts me so much.

They briefly address lowering defense spending before moving on to…


They use the phrase “Broaden the base and lower the rates” but they give NO DETAILS on how they would broaden the base and how they would lower the rates. One thing is for sure: their proposals would mean SIGNIFICANTLY INCREASED TAXES for my family. Why? Because they want to do away with…

• the exclusion for employer-sponsored health insurance

• the tax deduction for mortgage interest

• the tax deduction for state and local taxes and for charitable gifts

WOW! That would kill us.

I’m a reasonable person. If we want to do away with those things, fine. But, while we’re at it, why not just go with a FLAT TAX?

The authors don’t address welfare spending, which is unfortunate. Maybe that’s because this was a magazine article and not a book. Still, if I’m going to face higher taxes, I would like to see fewer people mooching off everyone else’s hard work.

From Number of the Week: Half of U.S. Lives in a Household Getting Benefits:

49.1%: Percent of the population that lives in a household where at least one member received some type of government benefit in the first quarter of 2011.

This number is misleading because it includes those receiving social security benefits even though they already paid at least something into the system.

I’m also not sure where he got 49.1% unless it’s overlap.


That number is concerning.

I’m sure it will come down some by the time Generation X retires and they means test us out of our benefits because we sacrificed and saved on our own.

From the Concise Encyclopedia of Economics regarding Social Security:

Social Security retirement benefits are based on average indexed monthly earnings for the thirty-five highest earnings years prior to retirement. The benefit formula is set up to favor lower-income workers. For example, in 2004, someone with average monthly earnings of $624 received a benefit that replaced 90 percent of earnings. Someone whose average monthly earnings were $3,760 received a benefit that replaced 42 percent of earnings, while someone with monthly earnings at the then-taxable maximum of $7,325 received a benefit that replaced only 28 percent of earnings.

This kind of proves the point I have been trying to make over the years that Social Security is progressive and not regressive like some people try to make it out to be. It would become ridiculously progressive were the income cap removed thereby subjecting all earnings to FICA.

As a side note, I think it’s kind of funny that the author of the article I link to has the last name “Saving.”

This is a follow-up to yesterday’s post, which you can read here.

As I mentioned yesterday, I have monthly total return data for BOTH the S&P 500 Index and the Barclay’s Aggregate Bond Index going back to January 1991 (I have S&P data going back to 1926). I thought it would be interesting to look at how much a person could have accumulated over the last 21 years had they been able to invest their social security contributions on their own.

The results were somewhat surprising.

According to my numbers, the portfolio that offered the highest end value was the one invested 100% in the Aggregate Bond Index: SS Invested in S&P 500 with Bonds (1991 – 2009).

Actually, when you consider the way the market has gone over the last 20+ years, it’s not surprising that the bonds outperformed stocks from a dollar cost averaging standpoint. Why? For one, when you’re investing a small amount of money over a long period of time, it’s best for the market to trend upward slowly so that you can accumulate more shares at the beginning, which will increase in value as the market increases. What we saw in the 90s and 2000s was a massive run-up followed by a massive drop.

Anyway, were social security contributions your money, and you maxed out those contributions over the last 21 years, you (and your employer) would have contributed $176,779 (I’m only counting the portion that goes towards social security, not disability). Your account balance would have been somewhere in the neighborhood of $322,000 to $335,000 (depending on your chosen asset allocation). And…that’s only for the last 21 years. Most people work much longer than that. So, it’s not out of the question that the account would be worth $450,000 or more over a thirty year (or longer) career.

Now some may look at those numbers and think that what social security is offering is a better deal. Here’s the thing: there is no free lunch! If social security is paying out more than a person could have earned investing in stocks and bonds, then that tells us the program is based on taking from the current earners to pay the current recipients. It’s “fine” as long as there are a greater number of employees contributing than there are retirees receiving. Not only that, if you did max out your social security contributions over the last 21 years, the government most likely will consider you rich and will take back a portion of your social security payment by taxing them.

So take a look at the PDF I put together and let me know what you think. Is there anything else you would like to see?

NOTE:Also, if you have monthly total return data for the Aggregate Bond Index that goes back farther than 1991 (and you’re willing to share), please let me know. It would be cool to be able to run different scenarios using more data.

Great Piece by Arthur Brooks

February 29, 2012

The expanding welfare state exists, in no small part, to shove marshmallows into our collective mouth. The government expunges sacrifice, smooths the risk out of our economic lives, and protects us from the consequences of our actions. It is aggressively moving us away from the national entrepreneurial ethos, teaching dependency and changing our relationship to the state.

This is not conservative dogma. Look at Greece. It is easy to get lost in the weeds of sovereign-debt ratings and monetary inflexibility, but the fundamental source of that country’s problems is straightforward. Politicians were unwilling for more than a decade to ask citizens for any meaningful sacrifice in public spending, which outstripped revenues. Citizens came to feel entitled to public resources their country had not earned and could not afford. As the country faced collapse, the result has been hopelessness, helplessness and Molotov cocktails.

That was from Obama’s Budget Flunks the Marshmallow Test which was in the February 24th edition of the WSJ.

By “marshmallow test,” Brooks is referring to the test conducted on kids in order to study self-control and deferred gratification.

Anyway, I agree with most everything Brooks says in his piece except for the idea of means-testing social security. He doesn’t mention it specifically but he alludes to it with this statement:

The present administration believes we should be able to get our country fiscally back on track without the vast majority of Americans having to accept less from government. Year after year, no entitlement recipient is asked to give up benefits—even benefits well above a basic safety net.

Good luck correcting this now. Meanwhile, the social security keeps raising the amount of income that’s subject to social security and those who are employed keep throwing more and more money down that hole.

Anyway, I like what Brooks has to say in this piece. It even goes hand-in-hand with the quote I posted yesterday from chapter two of “Think and Grow Rich” about how people tend to look at those who have achieved success in life as somehow catching a break that the rest of us didn’t get.

In 2012, the amount of income subject to social security taxes (confiscation) is going up to $110,100 from $106,800 (the wage base for 2009 – 2011). This means the maximum social security tax will now be $6,826.20 ($13,652.40 when you include the employer’s portion). Take a look at these two graphs I put together to see just how quickly the maximum tax and the amount of income subject to the tax have increased since 1965. It’s not a pretty picture (and it’s only going to get worse).

All of this wouldn’t bother me so much if…

1. We didn’t have to pay income tax on the amount confiscated.


2. I could plan on getting our share back when we retire. It’s doubtful that’s going to happen. What is there will get taxed away because we have managed to save on our own.

NOTE: While researching this post, I tried to find a history of the maximum social security payment amounts but came up empty. Do any of you know where I can find this information?