Social Insecurity

I recently received my Social Security Statement from the government and it shows why government programs that are supposed to be good for you don't always work out so well in practice.

I got my first job in 1978. Ever since then, 6.2% of my wages have been deducted and paid to the government. My employer has to match this amount. This is really the same thing as having to pay it myself, since an employer is going to look at the total cost to hire an employee when setting wages. All of those payments add up. If you do a simple calculation, if 12.4% of your wages are paid into social security, that means that for every eight years that you work, one entire years' worth of wages are paid into social security.

According to my recent statement, if I continue to work to age 67, I will receive a payment of $2,300 per month. Is this a good deal? Based on what my employers and I have paid in to date and assuming that I continue to earn the same amount that I have made the last five years, it will take me 14 years 8 months to receive back what has been paid in on my account without interest. That means that I would have to live to almost 82 just to get my money back. Will I live to be 82? According to the IRS (which publishes tables to determine the taxable value of annuities), someone who is 47 years old today can expect to live another 35.9 years. That means that my life expectancy at this point is about 83. Thus, I could expect to receive back $36,800 more than I paid in. Of course, the IRS uses unisex tables and men don't live as long as women, so maybe I wouldn't live long enough to break even after all.

Social security offers some other options for those who want to retire earlier or later, but they work out to about the same. If I retire at age 62, I would receive $1,611 per month. Based on my calculations, at this rate, it would take 18 years, 2 months or until age 80 years 2 months.

Finally, if I work to 70, I would receive about $2,852 per month. If I take this option, it would take me 12 years 8 months to get back to even, or until age 82 years 8 months. As you can see, the longer you choose to work and pay into the system, the longer it takes you to get your money back even if the amount of the payments goes up.

The analysis is further clouded by the fact that the government can change the deal at any time. For many years, the age to receive full retirement benefits was 65. It is now 67. There is talk about raising it to 70. In 1992, you only had to pay social security on earnings up to $53,400. Today the cap has nearly doubled to $102,000. Thus, all of the calculations that I have made above can and probably will change for the worse.

Can you imagine what would happen to a company in the private sector which offered an investment which required you to make payments for 50 years in order to receive a stream of income representing a net rate of return close to 0%?

To make it worse, the money that I am paying into social security is not being set aside for my retirement. Instead, it is being used to pay for my parents' retirement (just as their contributions paid for their parents' retirement). Thus, the only way that I can get my payments is if my children and their children continue to pay into the system. In the private sector, an investment scheme which relies on an influx of new investors in order to repay the contributions of old investors is known as a Ponzi Scheme and is illegal. When the government does it, it is known as Social Security.