The History and Future of Social Security
Social
Security is a poorly planned system that is not economically sound,
and is unfunded. The current Social Security tax rate is 12.5% and
this money is used to pay current retirees; thus none of the Social
Security taxes paid by an individual are actually invested for that
individual.
This is why it is considered unfunded. Because of this and because of
the aging population that is occurring all over the world, Social
Security benefits are becoming an increasingly large inhibitor of
economic growth, and are taking up a larger and larger share of federal
spending. In 2009, it has been estimated that Social Security and
Medicare are underfunded by around $50 trillion. This means that if the
benefits remain the same, and the FICA (Social Security and Medicare)
tax rate remains the same, an additional $50 trillion would still be
needed. Any company that had such a retirement program would rightly be
prosecuted.
To show how badly out-of-balance these programs have become,
between 1966 and 2006, Medicare and Social Security grew from 16% of
the federal budget to 40%. (Defense spending declined from 43% to 20% of
the budget during that period.) By 2050, spending on Social Security,
Medicare, and Medicaid is estimated to take up the entire federal
budget, if the budget were to remain the same proportion of Gross
Domestic Product
(GDP) as it is today. (This does not even include the interest on the
federal debt, which is increasing even more rapidly; it is projected to
be three times the entire GDP by 2050.) Obviously something will have to be done, and it will not be pretty.
Even worse, as of 2010 or so, people are paying more into Social Security than they, on average, will get out of it. For instance, if a person turned 65 in 2010, they will have paid into Social Security about $588,000 and will only get $555,000 in benefits. And these figures get worse every year. Thus, people are getting a negative return on their 'investment'.
Most people are not aware that when Roosevelt and Congress started Social Security, the FICA tax rate was only 2%, and even then only those who earned over the median income paid into it. Also, it was only intended to supplement one’s retirement. Now, virtually everyone who works pays into Social Security at a rate of about 12% of income, and it still is only intended to supplement to one’s retirement. This is truly pitiful and unbecoming of a great country.
Even worse, as of 2010 or so, people are paying more into Social Security than they, on average, will get out of it. For instance, if a person turned 65 in 2010, they will have paid into Social Security about $588,000 and will only get $555,000 in benefits. And these figures get worse every year. Thus, people are getting a negative return on their 'investment'.
Most people are not aware that when Roosevelt and Congress started Social Security, the FICA tax rate was only 2%, and even then only those who earned over the median income paid into it. Also, it was only intended to supplement one’s retirement. Now, virtually everyone who works pays into Social Security at a rate of about 12% of income, and it still is only intended to supplement to one’s retirement. This is truly pitiful and unbecoming of a great country.
Retirement Planning
In
a system based upon personal responsibility, individuals are
responsible for their own retirement funds. It would be wise to invest
at least 10% of one’s income into a retirement plan. I would recommend
that children be taught in school the importance of saving for
retirement from their very first paycheck.
To make the transition from our current system, we might require individuals to invest this money, although this would still slightly violate the premise of personal responsibility.
To make the transition from our current system, we might require individuals to invest this money, although this would still slightly violate the premise of personal responsibility.
(As an aside, another 5% or so should be used to purchase long-term care insurance, and to purchase disability insurance as well. Surprisingly often, many people will at some point become disabled, and/or need long-term care).
This 10% of one’s income would be invested in one of a number of government-approved investment companies. Such companies would have to meet certain strict standards, as determined by the government. These funds would be held in a segregated account in the individual’s name, so that such savings are immune from the solvency of an employer or the investment company. This is similar to many retirement plans many States use for State employees.
To
get an idea of how much money a person could have at retirement, let’s
assume that the person works for 40 years, and has a starting salary of
$36,000. Let’s also assume that the person only gets a raise equal to
the rate of inflation, so that they are essentially making $36,000 in
today’s dollars for their entire working life. This is a rather
conservative assumption, since the median income of men who worked full
time in the U.S. in 2007 was about $45,000. The final assumption is
that the entire amount is invested in a stock-index fund that mirrors
that entire stock market. Over any
40-year period since the modern stock market began in 1920, the stock
market averaged a gain of at least 10% annually.
Whipping
out my financial calculator, and investing $300 monthly (10% of the
$3,000 monthly salary) for 40 years, earning 10% per year, gives almost
$2 million in today’s dollars. (The actual amount would be the value of
$2 million of today’s dollars 40 years into the future, a much larger
figure.)
Once you retire, you can safely take out 5% of this $2 million each year without reducing the principle, so this would give an income of $100,000 per year for the rest of your life! And you would never have to worry about running out of money. When you die, the $2 million could be willed to one’s spouse, children, charity, etc.
Once you retire, you can safely take out 5% of this $2 million each year without reducing the principle, so this would give an income of $100,000 per year for the rest of your life! And you would never have to worry about running out of money. When you die, the $2 million could be willed to one’s spouse, children, charity, etc.
Imagine
how much better this is than the current Social Security system, which
takes over 12% of your income, and gives you about $25,000 per year for
life at retirement. This is what happens when government takes charge
of your life.
Even
better, we would no longer need to save additional money for retirement
as we do now. For instance, I work at the University of Texas at
Dallas. I pay 12.5% of my income (between me and my employer) into
Social Security. In addition, I am required to pay 15.5% into my
retirement plan. Under the plan I gave above, it would only cost 15% of
one’s income (which includes
long-term care and disability insurance as well as retirement). That
means I’d have an immediate additional 13% of income to spend. Would
you like a 13% raise?
Conclusion
We need to immediately implement a retirement program as described above.
At the same time, we need to phase out the fiscally irresponsible and
damaging Social Security program. But this needs to be done without
harming those retired or near retirement. This will be expensive to do,
but will only get more expensive the longer we wait. It is likely that
the best way to make the transition is to require individuals to put
15% of their income into their own retirement/disability program, and
yet still pay FICA taxes until almost everyone has their own well-funded
retirement program. This will take decades, but it took us decades to
get to where we are now. As usual, the piper must always be paid.
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Tim Farage is a Senior Lecturer in the Computer Science Department at The University of Texas at Dallas. You are welcome to comment upon this blog entry and/or to contact him at tfarage@hotmail.com.
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