|
Every generation scolds the next one
down the line and blames society's ills on the guy up at bat. Considering
past policy decisions, this common perspective doesn't make much sense. Just
look at the Great Depression generation, both known for its great character
as well as the worst policies of the century. Clearly, older generations did
not always make the best decisions.
One of those bad decisions, Social
Security, still haunts America today like the grim reaper waiting to take his
harvest. It's strange to think the same men who courageously stormed the
beaches of Normandy didn't have the political courage to dismantle this
ticking time bomb. If it wasn't for WWII veterans, many believe that this
article would be written in German. That might be true. But due to an
exploding national debt and that generation's failure with Social Security,
we'll be speaking Chinese sooner than German.
The lack of political will isn't
surprising since most past retirees were net gainers from Social Security
while new retirees are net losers. Older folks love bemoaning runaway
spending, welfare queens, and handouts. But often they don't consider their
own gains from the welfare state.
As Social Security taxes increased over
time, so did the benefits. Essentially, previous generations paid into the
system when taxes were low and retired when the benefits were high. A
retiree's maximum tax loss from Social Security in 1940 was $923 in today's
dollars. Compare this to the current maximum of $13,243.
To find the dividing line between net
gainers and losers, we created a projection assuming an individual with a
salary equaling the top taxable Social Security limit for 45 years (to get an
idea of this amount, consider the limit was $3,000 dollars in 1940 and
$106,800 in 2010 - both nice salaries). Our test dummy paid the maximum
Social Security taxes every year.
On the other hand, upon retirement, he
would receive maximum benefits. According to the Social Security
Administration, maximum taxation is a prerequisite to maximum payouts. Next,
we added Social Security benefits received over 13 years (derived from the
average U.S. life expectancy of about 78). Finally, we calculated the
difference between taxes paid over 45 years and the payouts received for 13.
The results were shocking.
Before 2007, our projected retirees were
net gainers from Social Security. 2007 retirees were the first net losers at
-$411. By 2011, retirees will be -$40,403 in the red.
In the '80s, a Greatest Generation
survivor retiring at 66 in 1985 received a net gain over his expected
lifespan of $113,350 in 2010 dollars. Just a decade down the road, a 1995
retiree still profited by $67,982.
While welfare is often equated with
public housing residents, perhaps nursing home residents should be considered
too. These Social Security payments outweigh many welfare handouts. For
example, California's maximum TANF (welfare) payments for a family of three
were $9,373 a year in 2005, inflation-adjusted for today. It takes over 12
years of welfare to equal the 1985 retirement net gain. (To be fair, if
housing subsidies, food stamps, and other benefits were included, the number
of years would be lower.)
So, are pre-2007 retired generations
complete bums? Well, not exactly. It depends on how the money would have been
spent otherwise. Suppose that instead of paying Social Security, the same
amounts had been placed into an account earning five percent a year.
After 45 years starting in 1940 and
ending in 1984, this account would have been worth over $297,000 in 2010
dollars. This is $44,000 more than 13 years of Social Security benefits
starting in 1985.
Hence, older retirees are bums on a
case-by-case basis. An investment-savvy penny-pincher would have lost from
Social Security. Without the program, he could have invested privately. But
spendthrift retirees benefitted enormously. The responsible saver is punished
and the careless spender rewarded - the same old story of welfare retold for
an older generation.
[And this note as an afterthought:
How Much Do You Really Pay for Social
Security?
The government has pulled a fast one on
most people. You pay half the Social Security tax and your employer pays the
second half, right? No, wrong. You actually pay both.
Let's go through this example to
understand the point. Let's say that a person earns $100,000 a year and pays
$6,000 in Social Security taxes and the employer pays $6,000. In the eyes of
the employer, the person's services are worth $106,000 ($100,000 salary +
$6,000 in Social Security taxes), that's how much he costs the employer.
Now, imagine what would happen if Social
Security taxes disappeared overnight. For a little while, the employer would
profit by paying $100,000 for an employee worth $106,000. However, in a free
market, prices move toward levels equaling the underlining value. Just like
good underpriced stocks will eventually move up, so does the price for good
undervalued employees - although, both may not be immediately appreciated.
Eventually, the person's wages would be
bid up in the market from $100,000 to $106,000. Because of this, the
employer's half is actually your half too. Without Social Security, your
wages would be close to your value to the employer, in this case, $106,000.
So, in reality, the person pays $6,000 in taxes and makes $6,000 less than he
would in a completely free market, meaning that the real loss is $12,000 per
year.
This is the kind of stuff the editors of The Casey Report spend
sleepless nights over. Where is the economy going? How much does politics
influence the markets, and in which direction? How can we profit? Answers to
these and more burning questions you’ll find in the March edition of
The Casey Report… with Bud Conrad’s musings on “The Point
of No Return.” Is the U.S. economy beyond repair? Find out with our
risk-free 3-month trial. More
here.
|
