Social Security: Crappy Deal…Getting Worse

CNN MONEY reports

“Up until now, Social Security has been a windfall for many retirees: They collected far more in benefits than they shelled out in taxes.

That’s changing. Many of those retiring will have paid more into the coveted entitlement program than they will get back.”

and

“The imbalance will get more pronounced for future generations of retirees. Couples now in their early 40s will have forked over $808,000 in Social Security taxes by the time they retire, but get back only $703,000 in benefits.”

Let me translate this…basically, the Ponzi scheme that is Social Security, now 78 years old, is now in its death throws. I’m not predicting it will actually end anytime soon, but this is definitely the beginning of the end. Someday, the young will begin questioning why they are paying so much and getting so little and revolt…or, maybe they won’t and it will simply go bust because the math dictates that it will.

Just a quick thought before I forget…what does it say about our society…that rather than taking personal responsibility for our own retirement, and as a backup depending on our family units..(kids, grandkids, nieces nephews siblings ect..). we have instead chosen to entrust our livelihood in old age to universally despised politicians who usually poll somewhere around 20% or so. That’s pretty messed up….just sayin. What the hell are we thinking?

Moving on to the numbers…I’m pretty sure it is actually way worse than what this report suggests because they more or less ignore the opportunity cost of holding on to your own money. So let’s look at a person who makes $50k per year He pays 6.2% as does his employer….don’t be fooled by Uncle Sam’s accounting funhouse.. you pay for both in the form of lower wages. So our average wage earner pays $6200 per year in Social Security Taxes, from 22 until he retires at 67. For simplicity, let’s ignore inflation…in his wages, and in his payout…they should more or less wipe each other out anyway.

So over this persons 45 year career, he pays a total of $279k into the program. When he hits 67, he is now eligible for ~14k per year….for the rest of his life. If he dies at 70….obviously this was a really crappy deal. If he makes it to 87, he more or less breaks even…that is…he could have literally put $6200 under the mattress (or maybe in a non-Cypress bank account) for 45 years and done just about as well as social security. If you happen to live longer than 87…still ignoring any other investment options you could have done with that $6200/year…maybe you start to get more than you paid in.

Yes…the math is terrible idea for just about everybody…which of course is why they have to force you to participate. Now, imagine if our worker, rather than stuffing that money in a mattress, decided to instead use that money to pay off his mortgage early. So, at 22, he decides to purchase a house for $125k(2.5x his annual income) with a 5% 30 year mortgage. His monthly payment is $671, which he makes, plus $6200 per year of extra payments. By the middle of year 12, his house is paid for…completely. He saves about $80k in interest, has a paid off house at 33, and now, has ($671*12+6200) over $14k per year…which he can now start stuffing under his mattress. If he does this for the next 18.5 years (when his mortgage would have ended), then proceeds to only save the 6200 per year until he is 67, he will have about 360k under his mattress, which would fund him at social security level payments until he was almost 93.

And remember, this is assuming all he ever did was pay off his mortgage early, and stuff the rest of the money under his mattress. No stocks, bonds, or even cd’s and saving accounts in this portfolio. So one wonders why this program exists at all. I touched on that a bit in Uncle Madoff Sam’s Trust Fund. Basically, I believe the program was created as an excuse to create a new source of government revenue. It gave them the ability to tax a broad base at a relatively low rate…in exchange for the promise to take care of you when you got old. Of course, back then, you were probably dead before you hit 60…and if you did happen to make it to 60, you were lucky to have a few years left. So of course government pocketed the taxes, and was happy to pay out a few $ here and there to those who managed to live long enough to “retire.” Social Security became a huge cash cow…and continued to be until just recently. By the end of this decade, it will instead be a huge cash drain.

This huge sham of a program simply needs to be scrapped, perhaps in a phased manner, and responsibility for retirement needs to be shifted back to individuals and their families. Problem Solved. In the meantime…the only thing for certain is that there will be pain.