Why Social Security Is In Trouble

[Burke]

You know, I get really tired of the argument that "I paid my dues, now the govt wants to cheat me out of what is rightfully mine...." etc, etc. I just ran some numbers on a client's Social Security benefits as opposed to what he paid in. He started SS benefits at 62. He recovered the total of what "he paid in" in a little over 3 years. He recovered what his employer matched in a little over 6 years. Now he is 70. And I expect he will draw benefits until age 85 approx. So by the time he nears the end of his life expectancy, he will have drawn just shy of a quarter of a million dollars from Soc Sec OVER and BEYOND what he paid in to begin with. Just an average Joe, not highly paid. Is America great or what?

[David1980]

Hmm, let's say someone averages $50k over a career of 40 years. Keeping thing simple, they never get raises, and there's no inflation or anything...

With the employer match, they'll pay in $7,650 per year. So after 40 years they have paid in $306,000.

http://www.bankrate.com/calculators/...alculator.aspx for this scenario indicates a taxpayer age 25 today retiring at 65 would get $19,500 per year. Or basically 6.37% of the total they pay in each year.

It'll take them 15.69 years to equal the benefits paid in with the distributions they receive. So they would "break even" at about 80 years of age.

Sounds OK, but what if they instead keep the $7,650 per year, invest it all at 5%, and live off interest alone at age 65?

They will end up with $970,324.19 at age 65, and continuing on at 5% and living off interest alone they'll have $48,516.21 per year. And then when they die, they've still got a million bucks (rounded up).

That doesn't make social security look like a very worthwhile investment. You might recapture your contributions, but if you invested on your own you'd do far better. Granted, taxes makes it a little more complex, but I'm not convinced taxes alone will push social security to beat the private investment.

The risk with private investment is of course losing it all. Someone might make a bad investment (hey, let's put all my retirement into this risky stock company and hope they do well!) and be totally screwed. Or, someone might choose not to save for retirement at all. Social security is a forced retirement and you'll get something, even if you are a total idiot.

[Black Bart]

I agree with Burke's conclusions.

Several years ago an SSA spokesman told our seminar class that the "average recipient" got all his/her money back within three years of retirement.

...say someone averages $50k over a career of 40 years...they'll pay in $7,650 per year. So after 40 years they have paid in $306.000...taxpayer age 25 today retiring at 65...what if they instead keep the $7,650 per year, invest it all at 5%, and live off interest alone at age 65?

I don't think the average employee in the USA makes $50,000. Too, show me the the average guy who socks away $7,650 in a savings account every year and I'll show you a unicorn.

...Or, someone might choose not to save for retirement at all. Social security is a forced retirement and you'll get something, even if you are a total idiot.

However you classify 'em (idiots/fools/knaves/unfortunate/unthinking), the country's full of people who haven't saved a dime and have no income other than social security.

[JohnH]

Pooled risk, paternalism, and political mischief.

Another thing to consider regarding the Social Securiy tax and equating it to a savings plan is the disabilty component. You have to discount the portion that would be paid for a decent disability policy in calculating what you would have available for investment.

Here's a link to an especially good discussion on Social Security. I respect James Kwak in spite of the fact that I sometimes disagree with him politically. Given all the drivel out there from Conservatives and Liberals, each pushing their own agenda for the sole purpose of gaining and holding political power, it's refreshing to read someone who actually takes the time to present well-reasoned opinions rather than the talking point of the day.

Caution, this one requires more than one reading, unless you're an actuary (or maybe just smarter than I am, which isn't a big leap)

http://baselinescenario.com/2011/07/20/social-security-for-beginners/#entry

[Roberts]

From what I've read it's BASICALLY designed so that whether you start payouts at age 62, 65 or 67, your breakeven in determining which is the better start date is around the age of 77. It's also when you've received all of your contributions back and are now receiving extra.

SS isn't an investment and it was never designed to be a retirement plan. It's a support program so that everyone has a minimum support level. As JohnH wrote, there are insurance benefits included that are very important. Once you include the insurance premiums, it's not a horrific deal.

One thing I've noticed with people is that the poorer they are, the earlier they take retirement benefits when they would probably be better off delaying as long as possible. If you are retiring without a home paid off and have something like $75,000 in savings - you would be better off spending your savings and delaying your SS benefits for a larger monthly check. JMO. If you have $75k in savings and your spouse goes into a nursing home, say goodbye to that $75k pretty quickly before Medicaid picks up the tab.

[JON]

Social Security

was basically set up so our generation paid for the previous generation (I am 64). Until the 1990s and 2000s when base and rates increased we were trying to get the first generations covered. My father retired at age 66 in 1978 and died in 1984 - He was paid SS that used up what he had paid in in less than 3 years. My mother lived until 2001 drawing his social security. Do the numbers - they do not work. In our system politics played a BIG roll as no one wanted to be part of the solution that this could not work forever. The fact was my group (the boomers) was way to large to expect the generations behind us to support us in our retirement. We have importedf lots of people in an attempt to narrow that gap, but the numbers still do not work. DC would play with the numbers to say it will not go bust to 2040 - all a bunch of BS. In 2011 in January DC announces that SS will pay out more than it takes in for the first time(originally they thought this would not happen until like 2016). There are no reserves, but in theory there are US government notes to be cashed in to cover the deficits, because the cash was thrown into the general fund. Now they probably need to have "means testing" and set limits amounts until it works. Elected people, both parties, do not want to do that, but the wall is in front of us and something has to be done. It was never intended to be a retirement plan. Government should be what it has to be not what everyone wants it to be. We have learned that the hard way.

[arlo]

Social

Call it what it is, the start of Social ism.
My take on it is that if your well enough off and don't need it, maybe you should only
get what you paid into it That is my case but I am greedy like everone else.

[joanmcq]

One thing that ticked me off was finding out that if a parent with minor children is collecting SS...for example someone who has kids late in life or a 'second family', the kids automatically get SS benefits too. WTF? Why is this? What's the point? If you haven't learned how to keep from having kids by the time you get that old, you deserve to have to support them on whatever you make. And, of course, this is usually guys with much younger wives...who are still of working age, and should be, what with geezer able to sit at home and take care of the kids.

[Jiggers]

One thing that ticked me off was finding out that if a parent with minor children is collecting SS...for example someone who has kids late in life or a 'second family', the kids automatically get SS benefits too. WTF? Why is this? What's the point? If you haven't learned how to keep from having kids by the time you get that old, you deserve to have to support them on whatever you make. And, of course, this is usually guys with much younger wives...who are still of working age, and should be, what with geezer able to sit at home and take care of the kids.

This also applies to grandparents who are raising grandkids.

And parents on SS disability.

But don't get me started......................

[Burke]

Yes, if a parent with minor children begins benefits, he gets it for each child as well. I have one client right now who is getting it for himself and 2 kids. One will drop off this year and one in two years. Counting their benefit, gross income in household is over $100K. (Original wife but younger. ) Also had a case where father died at 58, left 4 minor children, youngest was 7. Wife drew benefits for herself and each child until last one turned 18, then she started drawing widow's benefit at 60. Lived for another 11 years, so drew SS for 22 years. In the last case, benefit was necessary. In the first case, it is not.

[Burke]

One thing I've noticed with people is that the poorer they are, the earlier they take retirement benefits when they would probably be better off delaying as long as possible.

I recently heard on the radio something to the effect that 60% of retirees apply for benefits early. Can anyone corroborate that? Many are convinced to draw early due to the rumors of impending insolvency and the fact that nothing is vested. If you start at 62, and drop dead at 63, your estate gets nothing. Better to take it and bank it.

[taxxcpa]

Call it what it is, the start of Social ism.
My take on it is that if your well enough off and don't need it, maybe you should only
get what you paid into it That is my case but I am greedy like everone else.

You have a good point, but the dollars paid into the fund were worth more than the dollars you would draw out today. This is the biggest flaw in the system. If the money had been invested in the Dow Jones beginning when it was 1000 or less it would be worth a lot more than the dollars put into the fund.

[JohnH]

I recently heard on the radio something to the effect that 60% of retirees apply for benefits early. Can anyone corroborate that? Many are convinced to draw early due to the rumors of impending insolvency and the fact that nothing is vested. If you start at 62, and drop dead at 63, your estate gets nothing. Better to take it and bank it.

Your 60% figure is correct.
Here's the link:

http://www.businesslife.com/articles.php?id=1041

This article offered some other interesting insights, but it confirmed one of my personal biases. The danger in retirement is never the risk that you might leave some money on the table. The real risk is that you will outlive your income-producing assets.
So by taking early retirement, one condemns the Social Security portion of their retirement income ( regardless of whether it's20-40-60-80-100%) to a low starting point and thus to lifetime limited increases. They will always be behind the curve in real dollars, irrespective of all other considerations. Unfortunately, the people whom this impacts the hardest are those who can least afford the risk.

The only person who should take early retirement is someone who is in bad health and their prospects for living a long life are not good. I realize that some people must retire early due to job losses, etc. But for anyone who has options, they should definitely continue working unti full retirement age. Unless they just like to play the retirement lottery or are independently wealthy and Socia Security is jus icing on the cake.

[S T]

Have always discouraged

clients from taking SS retirement early at age 62, but some just won't listen. I have just always believed in waiting until the full retirement age. Of course individual circumstances could have an impact on the decision.

Just encountered a client that did not listen, husband retired early and applied for his SS retirement (that worked out okay - not knowing what the future was - as he just passed away a few months ago) so husband received his benefit for approximately 3 years or so prior to full retirement age.

However, on the flip side, the spouse (now widow) also applied for her retirement under his, she turns 65 in Sept - so while she recevied a benefit for the last few years, she now is being penalized almost $ 600 per month (losing that portion of the calculation of the deceased husband) of her benefit for early retirement application.

Now she could really use the additional monthly benefit on her account, but that won't happen.

Is there some type of calculation software available to do the what if's at age 62 or earlier than the 65/66/67 full age of retirement???

Sandy
Sandy

[JohnH]

clients from taking SS retirement early at age 62, but some just won't listen. I have just always believed in waiting until the full retirement age. Of course individual circumstances could have an impact...

Is there some type of calculation software available to do the what if's at age 62 or earlier than the 65/66/67 full age of retirement???

Sandy
Sandy

Sandy:

This is a good resource:

http://www.ssa.gov/oact/quickcalc/early_late.html

Sadly, the situation you described is repeated all too often. People just can't wait to get their hands on that Social Security check, with total disregard for the long-term consequences.

Someone mentioned earlier that some people are motivated to retire early out of fear that the system is going to run out of money. My answer to that silliness is always the same. If you really believe that the system is going to run out of money, you need to invest in precious metal. And there's only one precious metal that will matter if that happens - LEAD.