Middle Class Suckers

The 1935 Social Security Act was created to ensure the financial stability of US citizens when they need it. We pay FICA taxes (Federal Insurance Contributions Act) in and get monthly payments back out under certain conditions. Under a situation like this, it would be prudent if the FICA paid in by a person was collected, invested, and then used to pay out the benefits for that same person when that time came. In that way, each person’s taxes are paying for their own benefits. Our federal government has invested our excess FICA tax money in special series non-marketable U.S. Government bonds. The particular bond type is the Government Account Series (GAS.) So far, this all looks good. The “Social Security Trust Fund” has been invested in bonds that should be worth more at maturity than when they were purchased, thus making money on the over 4 Trillion dollars of excess FICA taxes collected.

Sadly, this is the case. What? That is correct. This is exactly what has happened. The reason it is sad is because very few people really understand what has truly happened. Let’s explore a bit further. The particular bond type, the Government Account Series, is NON-MARKETABLE. That means it cannot be sold to anybody but another federal government department or bureau. So that $4+ trillion in FICA taxes collected that is supposed to be there to pay out social security benefits has been transferred to other government departments and spent. Now we have pieces of paper that say those departments need to give that money back when the social security office needs to pay out benefits. But those departments have already spent it. It is gone. So now the current taxpayer has to pay that $4+ trillion a SECOND time!

So what does that leave us with? Our social security system has paper IOU’s that can only be paid with currently collected taxes. The current outgoing payments are only funded by current tax paid dollars. That will continue to function as long as we have enough people paying in. But what guarantee do we have of that? Simply put, none.

The social security system is now a system where the payout going to people at the top is being fed by people at the bottom. The people at the bottom move up in years and hope there are enough younger people added to the bottom to feed tax money in so they can collect while they are at the top. Let’s compare this to a pyramid scheme. Wiki says a

…pyramid scheme is a non-sustainable business model that involves promising participants payment or services, primarily for enrolling other people into the scheme, rather than supplying any real investment or sale of products or services to the public. … The flaw is that there is no end benefit. The money simply travels up the chain. Only the originator (sometimes called the “pharaoh”) and a very few at the top levels of the pyramid make significant amounts of money. The amounts dwindle steeply down the pyramid slopes. Individuals at the bottom of the pyramid (those who subscribed to the plan, but were not able to recruit any followers themselves) end up with a deficit.

So those paying years ago are paid from funds of those that pay in today. Those paying in today hope to get their payments from those paying in the future. This money travels directly up the chain just like a pyramid scheme. There are claims that the social security system is not so because the money paid in today is in the “trust fund” ready to pay out in the future. We have shown this to not be true. The GSA’s will only be exchanged for new money obtained by the government through current taxes.

There is another claim to the difference: the power of the federal government to ensure payment into the system through taxation. Let’s explore the claim of taxing to ensure the future influx of cash into the social security system. There is no guarantee that there will be more people paying into the system than will be taking out nor that incoming FICA tax revenue will meet outgoing payments. In 2011 the total expenditures were $736,083 [million] and total receipts were $805,057 [millions.] That looks good until you dig into where the total receipts comes from. There were only $564,231 [millions] in FICA payroll tax contributions and $23,792 [millions] in income from taxation of the benefits supplied. That totals a mere $588,023 [millions.] The rest came from general fund reimbursements which are taken from NON-FICA taxes collected in 2011, and interest. But that interest comes from other government departments, which is again from NON-FICA taxes collected in 2011, plus a relatively small amounts of gifts to the fund. Ignoring the small gift amounts the FICA tax income was short $171,852 [millions] or over $171 billion. Tell me again how the government can assure us that this system is sustainable.

Oh, I found it on wiki:

In 2007, the Social Security Trustees suggested that either the payroll tax could increase to 16.41 percent in 2041 and steadily increased to 17.60 percent in 2081 or a cut in benefits by 25 percent in 2041 and steadily increased to an overall cut of 30 percent in 2081.

So you pay into this system all your life just to get back 70% of what you was promised, in addition paying NON-FICA taxes to cash out the GSA’s. So how secure will you feel when they break that promise of security the next time? What about the time after that? For a real social security system, please read “Where does our Social Security go?”

SOURCES:
1. Social Security wiki ( http://en.wikipedia.org )
2. Social Security government ( http://www.ssa.gov )
3. Social Security recipients ( http://www.ssa.gov )
4. Social Security expenditures and incomes ( http://www.socialsecurity.gov )
5. Pyramid scheme wiki ( http://en.wikipedia.org )

Social security handles both retirement payments, and payments to families when family members die. If an American citizen has no spouse or children to support, then there is no survivorship to contend with. And once children are age 18, they are themselves of age and self-reliant and therefore precluded from survivorship benefits.

Looking over the life expectancy numbers shows a difference between men and women. It also shows that the vast majority of people are highly likely to live at least close to retirement. With the generalization that men and women are split evenly in population (for ease of the math), one half a percent of babies will tragically die before their first birthday, and another half before age three. While we mourn such losses, these children never grew of age to start into the workforce and have a family. So they will not be included in our examination of social security survivorship payments.

We will not be concerning ourselves with the rich here because they have the financial resources to take care of themselves and their families. And so do the middle class in this country. It is those near the bottom that such safety nets are designed to catch. So we will see how this would affect an dedicated minimum wage earner. For our example, we will take a young American citizen born on Jan 1st 1964. They turned 18 in 1982, starting at a minimum wage of $3.35 per hour. If our model citizen worked hard enough to stay employed, but garnered a mere 2% raise per year, and assuming minimum wage stays at $7.25 for the remainder of their working years we end up with this table:

* Where .5% is one half of one percent of the people.

(Please refer to “Where does our Social Security go?” for more details about the above numbers concerning a minimum wage earner.) This can be continued, but let’s just start with what we have here. At age 58, any surviving children will most like be 18 or older and will not qualify. We have a small 6.5% of the populous that will most likely die prior to retirement (with the early retirement age of 59 and a half.) Only half the US adults are married. Using the 2000 census numbers, half the families have no children and those that have children average less than two. So using these factors we have half of those dying early have no survivors getting benefits, one quarter have a surviving spouse only, and one quarter have a surviving spouse with an average of about two children.

Let’s start with families without children:

* Where .125% is only one eighth of one percent of the people.

These 1.625% of people can cover most of these costs with a term life insurance policy starting at age 25 with just a 2% certificate of deposit. For around $40 per month that covers a $400,000 policy. If need be, make it a mandatory policy to ensure their social well-being. So that leaves the last 1.625% of people that die early and have children. The above term life insurance policy would pay for half of it. Let’s adjust the tax system a bit and pay them each an equal portion of the Federal cigarette tax collected each year up to half the current payment. The remainder of the funds should go to the non-retired disabled that truly need our assistance. Since the smokers are more likely to die early, there is a chance that there might be some correlation between the tax collected and the early deaths. The less smokers, the more likelihood that people won’t die early, and the less people needing such benefits.

If you are a surviving spouse receiving social security survivor benefits, are you surviving? Would you rather have hundreds of thousands of dollars in the bank ready for you when you need it, or would you rather get that check for $669 each month which is way below the poverty line? If you are a child reading this, please understand that if one of your parents die, $1339 is all that is coming from social security. And when you reach age 18, nothing will come any longer and your surviving parent will get a reduced payment of $669. If you are a spouse or parent, and truly want a better life for your survivors, don’t let your family suffer and live in poverty with a meager government handout.

We can continue to vote for politicians that keep us living way below the poverty line with pathetic monthly payments or we can change those we vote for so even those making minimum wage would pass on hundreds of thousands or even millions of dollars to their families when they die.

NOTE: I am not an insurance agent. I don’t sell insurance, nor does my wife or parents. I have nothing to do with insurance except that I have it. I am just a citizen trying to help others see better ways to live our lives as Americans.

SOURCES:
1. Life expectancy ( http://plus.maths.org )
2. Child bearing ( http://www.deseretnews.com )
3. Population information ( http://www.census.gov )
4. Term life insurance rates ( http://www.schuermaninsurance.com )
5. Poverty line ( http://aspe.hhs.gov/poverty )

We each pay 6.2% of every pay check as a Social Security Income tax, except for the temporary reduction in our contribution. Our employer matches with 6.2%. That is 12.4% of your gross income being nicely tucked away for your retirement. Let’s looks at our current social security system versus a slightly different model to compare the outcomes. Let’s see how this would affect an dedicated minimum wage earner. For our example, we will take a young American citizen born on Jan 1st 1964. They turned 18 in 1982, starting at a minimum wage of $3.35 per hour. If our model citizen worked hard enough to stay employed, but garnered a mere 2% raise per year, and assuming minimum wage stays at $7.25 for the remainder of their working years (which is highly unlikely), they end up with an $862 monthly benefit from social security at age 66.

Now taking a look at a second model where these same social security income funds are deposited into a retirement account under our model citizen’s name similar to an IRA. They can manage the funds themselves. For the average of all the 50 year averages of stock market returns over the last 100 years (to make sure we get all the major crashes) the return is slightly more than 10% per year. The worst 50 year return happened during the great depression and is 6.8%. Since then we have been have been between 9% and 13%, let’s use 7.75% as a very low ball average yearly return. Now after our American toils year in and year out, they would have $542,864 in their retirement account at age 66. After retirement they shift their half million plus dollars into a very safe investment with just a 2% return. They would draw $904 in interest every month for the rest of their life.

This is locking in the minimum wage at its current rate for 20+ years which is not likely to happen.
This is using Federal minimum wage numbers, which are lower than most state minimum wage numbers.
This is using a yearly pre-retirement interest rate that is about 75% of the 50 year average and only has dropped below that 4 times in the last 110+ years.
This is using a paltry retirement return of 2%, which even with our current terrible economy with quantitative easing is obtainable in long term CDs.

I am sure rules could be created to allow some drawdown of principle over time, but let’s suppose that this doesn’t happen. Then the spouse/life partner/children would get this half million dollars. If two people do this that is over 1 million dollars which is over $1800 per month.

Now lets look at how this would work better than any program ever created to eliminate poverty. When the parents’ die, the children get their retirement account infused with a large sum. Lets say this family had three kids. Each child would receive over $330,000 to add to their retirement accounts. If their children struggle in life at minimum wage like their parents did, they would each almost be millionaires themselves. Just including the lump sum inheritance would move these children each to $1450 per month using the same numbers.

So the best life expectancy in 2020 as per our Federal government is 82.4 years. Using 83, the Federal government will have taken $727,438 of an minimum wage earner’s money, and given back $184,574 of that in payments, leaving the United States Federal government to keep the remaining $542,864. So every minimum wage earner is giving the Federal government over HALF A MILLION DOLLARS.

So why any working person, even a life-long minimum wage earner ever be against reforming social security into personal retirement accounts is beyond me. Apparently the poor in this country would rather the Federal government take their money instead having over HALF A MILLION DOLLARS sitting in their bank accounts when they retire.

(NOTE: Most middle class workers would have several million dollars in their personal accounts at retirement, which far exceeds anything they will get from the Federal Government.)

SOURCES:
1. Yearly federal minimum wages (http://www.infoplease.com)
2. Stock market 50 year averages (http://articles.marketwatch.com)
and (http://observationsandnotes.blogspot.com)
3. CD rates (https://www.google.com/advisor/uscd)
4. Life expectancy (http://www.census.gov)