There are very few programs in the US which are understood less than the Social Security program. You’ll hear a lot of mis-information about Social Security. “You’ll never get what you put into it!” “I’ll be lucky to get anything.” So on and so forth. The mis-information you hear contributes to giving the Social Security (SS) program a bad rap. I contend, however, that there is not better bang for your buck than the SS program – especially after adjusting for risk.
As a youngster, I hated the SS program. I’d look at my paycheck and see all the money going by the wayside into something, at the time, I believed I would never see back in return. In fact, I found myself doing the same calculations PK over at DQYDJ does. Today, however, I believe I will see some form of “benefit” from the program sometime in the future. You could say, I have evolved to the view point of Free By 50. As a SS VIP contributor (read: since graduating college, I have always contributed the max to SS), my benefit does not have the “return” many people will have because the program is “means tested,” but I find the benefit to be valuable nonetheless. Here’s why…
Back over at PK’s blog where he was comparing what we all hope stock market returns will be over the long-term to how one’s SS retirement benefit “performs,” a common and unfortunately very uneducated comment was made by Marvin at Brick-by-Brick Investing, “Social Security was a FANTASTIC investment 30 years ago. Unfortunately for this generation it will be an awful investment because they will only get pennies on the dollar of what they put in.” In some cases, this is very true. And in a lot of cases it is very false. How can Marvin’s misguided statement be true? Take an individual who is unwed and has no dependents. Say they retire at Full Retirement Age (FRA) and then die at FRA + 1 month. True, they only get pennies on the dollar of what they put in. But, the question then becomes, what does a dead person with no dependents care? There are other examples like a person retiring under the sweet deal of CSRS (Civil Service Retirement System) and then working in a job which “pays in[to]” SS for 10 years or so, they will be subject to the WEP (Windfall Elimination Provision), and they may get “pennies on the dollar of what they put in.” True again. But, also very dependent on when one dies.
For most of us, however, Marvin’s statement isn’t true. John Greaney, who has from my point of view, fought the good fight on many fronts and is a terribly intelligent human being, updated his site in Jan 2013 to reflect why he thinks Social Security was a “better deal than he thought.” The full analysis is in the link, but the gist is, when comparing SS retirement to current annuity rates with a COLA (cost of living adjustment) and in some cases a surviving benefit for a spouse (price tag is the same with SS), SS for John Greaney is a better deal. But, Greaney retired at the ripe ol’ age of 38. I assume he had high income, contributing to SS at or near the max for 15-16 years. With the SS calculation taking into account your 35 highest years of earnings, someone like Greaney would have a “high earnings” for 15-16 years and then zero’s for the rest. Since SS is “means tested” in the form of bend points to calculate your benefit, all those zero’s in his earning record translates to Greaney benefiting more from additional “contributions” to the SS system. He found himself with some royalties and making about $4800 worth of contributions to the SS system. When he compared his increase in SS benefit due to the $4800 worth of contributions to a private annuity with a COL rider would cost, Greaney found he is getting 50% more benefit through SS than he could buy a private annuity policy for. So John Greaney is getting more than “pennies on the dollar.” Of course, he is now in his 50’s and it is always dependent on when you die.
What I really want to explore, however, is at the bottom of Greaney’s article in big bold letters, “Do high income Social Security recipients get hosed?” Since we have established that someone who has a “low wage” earning record can stand to return more than “pennies on the dollar” and even a better deal than today’s annuity market, the next question is, how does someone on the other end of the spectrum make out? Greaney establishes that if you contributed the max to the SS program for 35 years and reached ages 62 in 2012, the following would be true:
- You would have at least contributed $144,813
- Your employer (in the case of those self-employed, that’s you) matches that $144,813, for a total of $289,626
- Your SS retirement benefit would be $1,881/mo
- An individual policy for an $1,881/mo benefit would cost $571k or $616k if female or $1.1 mil for 150% benefit and survivor benefit
- If you were entitled to all $289,626 along the way and invested it, the following could be your scenario (+ means you are better off in the private market, – means you are better off with SS)
If we were all able to pick a certain future, we would pick no SS and the 10% returns (and too many of you will erroneously think you will have 10% returns). As we all know, however, we individually have very little control future returns. In essence, for the highest paid, SS may or may not be a good deal for them. All this analysis is for a single person, with no survivor benefit. If you start to consider there are couples where a spouse may never “contribute” to the program, but will have the benefits in the SS program—50% of their spouse’s benefit AND a survival benefit—SS looks to be more attractive. To purchase these “riders” on a private annuity policy, the premium would be close to $1.1 mil. As Greaney says, “Whether or not Social Security is a good deal for high income earners depends on their investing luck and skill.”
Finally, today’s interest rates keep annuity premiums higher than if interest rates were to rise. If interest rates came up, the cost of the annuity will go down, making SS look less attractive. But, just as we don’t know when we will die, this only illustrates my point that we don’t know the environment when we retire. And this is the reason Social Security must continue—it brings stability to our retirement years (with a whole slew of other things, like disability and survivor benefits).
When we look at the SS tax, it is often easy to dismiss it as a waste. But, what SS brings is stability to retirement plans. And while someone may end up getting the short end of the stick (in which case they will be dead and probably have very little interest in money), some of us benefit greatly from the program (let’s hear it for my Aunt Gertie who is going on 97!). If you still think you are better off without the SS program, please imagine what would happen if you had an emergency (a child needs your monetary help, your house is subject to an earthquake you didn’t have earthquake insurance, the stock market tanks and doesn’t recover for 15 years etc). SS is a foundation to build your retirement plans on. And if you refuse to still believe the program will benefit you in any useful way, think of it as keeping all the old people off the streets and from begging you for money.
When things are going well, we’re untouchable. But, we never know when we’ll be down on our luck and that is why SS is important to every American—pennies on the dollar or not. Or as the perspicacious Mike Tyson said, “Everyone has a plan until they get punched in the face.”
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WILL you be lucky? Or do/will you have the skills to come out ahead of SS? Or are you a supporter of the SS program?