Social Security, or OASDI (old age, survivors and disability insurance) has been good to me. When retirement income began in 2003, my earnings record showed I had paid-in $57,605 and my employers' contributions were $78,298 -- a total input of $135,903. Yet, my monthly benefit was a tidy $1,572. (Then, it would actually cost about $227,000 for an age-65, life-only commercial annuity monthly income of $1,572.) In 2009, my monthly payment is $1,997 (due to an average annual compounded cost-of-living increase of exactly 4 percent throughout six years.)
The bottom line:
In six years, I've received over $100,000 in OASDI payments. Yet, in 2009, the present value at age 71 of $1,997 monthly ($230,000) exceeds the present value of $1,572 at age 65, when benefits began. (If you build-in a future inflation factor of, say, 4 per cent annually, the 2009 present value increases to over $300,000.)
Now, that's a pretty fine pension plan.
When you think about it, Social Security simply pays a pension income that ends at death. You stand ready to lose everything to an early demise, and you can't cash-out. Yet, OASDI is revered by nearly everyone who receives its income. Interestingly, the insurance industry hasn't taken advantage by marketing SPIAs that can pay lifelong incomes. Even now, carriers fear retribution from beneficiaries if SPIAs pay a life-only income. When will we realize that what counts is not what capital is, but what capital does? It's time to educate clients on how to use income annuities in retirement planning. Life insurance and annuities that pay lifelong incomes are the key game in town.
It's apparent that many OASDI recipients have received even better results than I. That's because in 1935, Social Security was designed as modest income in retirement. With life expectancy then of about age 63, most people would die before benefits began at age 65. You can only guess how good it's been for retired workers presently in their 80s and 90s.
Social Security facts and factors
Nowadays, there are 42 million OASDI payees. That's 14 percent of our population of 304 million people; it's also about 20 percent of eligible voters. In 2008, they received an average of $1,150 monthly. The average age of payees is 71 (that's a present value of about $135,000 each.) The maximum monthly benefit in 2009 is $2,323. Since 1972, benefits are adjusted for inflation. Annual worker contributions are up to $6,621.60 on wages of $106,800, with an equal employer match -- a total of $13,243.20. That's a healthy $1,100 or so paid-in each month. And, it could be for naught! There are six trustees of the Social Security trust fund: Timothy Geithner, Kathleen Sebelius, Hilda Solis and Michael Astrue -- Secretaries of the Treasury, Health and Human Resources, Labor and the Commissioner of Social Security. Curiously, public trustee positions are vacant at this time.
Know also that the present Social Security trust fund of $2.2 trillion (end of 2008) isn't really a fund. Interestingly, I estimate the present value of future benefits for merely present retirees at about $5.7 trillion (42 million payees x $135,000 in present values). This was supported in 2008 by only $575 billion in payroll taxes and $105 billion in interest earnings. There isn't some Washington D.C. real estate, corporate bonds or mutual funds that back up everything. The OASDI "fund" is a pay-as-you-go program on schedule to disappear gradually before self destructing in 2037. (In 2003, that date was 2042.) There will also be a reduction of 24 percent in benefits by 2037 -- less than three decades from now -- if we are lucky and things don't implode earlier.
Ken Dychtwald (Age Wave) refers to Social Security seemingly as a ponzi scheme. If you are familiar with minimum funding standards for pension plans, you'd think it is worse. At least with a Ponzi scheme, someone usually goes to jail. When you or I eventually get a 24 percent or worse reduction in benefits, it will be too late to put today's bureaucrats away. They'll probably be somewhere collecting full federal pensions. Instead, they could do something now and make such a difference for our children and grandchildren.
Suppose younger workers rebel and subtract OASDI contributions from their income taxes. Then, they hire a good IRS tax defense law firm en masse. That could even make me want to practice law.
Social Security's cornerstone assumptions
Could a mere 24 percent income reduction in 2037 be a or unrealistic low figure? Maybe. Consider this:
Certainly, Social Security incomes are increasing due to inflation -- 4 percent compounded annually throughout the last six years. That's a double in 18 years and a triple by 2037. Just think what 5 percent or 6 percent inflation could do. Where will the money come from?
Today, there are four or five workers for every retiree; in 20 years, there will be only two or three.
Could real wages plummet with a corresponding decrease in OASDI contributions?
Surely, OASDI's 2037 model presumes only a modest unemployment rate. In 2009, I'm not sure the rate is "modest."
Are we in a recession now? A depression? Could a few more of these downturns really affect a mere 24 percent OASDI increase? And, earlier than 2037?
Population growth (fertility):
Will the birth rate decrease more than expected? If so, where are workers going to come from to pick up the slack?
Throughout the next three decades, it seems that we'll approach a life expectancy from birth to roughly age 80. What may even be more important is how long OASDI recipients will live. They are healthy and take care of themselves, and many may live well into their 90s. Can OASDI afford to pay $3,000 or so monthly to healthy sixty-something boomers who live that long?
To receive OASDI income, means testing would require income or assets under a certain level. If only the "non-wealthy" receive benefits, could means testing cause a counter-productive disincentive to save?
The integrity of OASDI's trust "fund":
Although there really isn't any trust fund (and everyone must depend on the full faith and credit of the U.S. for payments), everything still impacts year 2037, when benefits are cut back. Could the fund disappear soon due to "more pressing" needs such as health care or payment on the national debt?
Finally, as long as Social Security exists, there will inevitably be benefits paid out. If it must, the government will either (a) increase income, (b) borrow money, (c) print more money, or (d) get leaner and meaner. Never must we fear. But, it may not be pretty.
Tweaks and Band-Aids for OASDI
So, what could be done if only Congress has time to take action? Here's a list of the possibilities.
1. Increase the OASDI wage base over $106,800. This raises contributions for higher income workers.
2. Increase employer and employer contributions to more than 12.4 percent in total. This affects all workers.
3. Decrease present benefits for everyone. Try a 10 percent reduction. Or, decrease payments in some order, say, less for older payees.
4. Fully include OASI benefits in taxable income, then add the increase in taxes to the $2.2 trillion trust fund. Good luck!
5. Decrease benefits for the "wealthy." This is so-called means testing where you can't own or earn too much or you'll lose out.
6. Increase the normal retirement date now from age 66-even to age 72. This seems consistent with a view that boomers will work into their 70s anyway. Better yet: Raise the age at which full benefits can be collected.
7. Eliminate or reduce OASDI income increases due to cost-of-living index changes.
8. Relax and don't do anything. When the fund is gone and shortfalls occur, (2037 or earlier) simply pay them from general revenue. This causes a deferred increase in income taxes and pushes out the problem. But it probably increases the chances of voter rebellion among younger workers.
9. Some combination of the above. It might even help to ponder a recent motivational training conference at the Arizona Biltmore that cost taxpayers $700,000. Six hundred fifty managers (and family) of the Social Security Administration attended the meeting. It reportedly included dancers and motivational speakers.
To sum up, how would you rank the solutions above? And why? Are there others? We need to get good at number crunching and help our legislators.
Actually, there is a notion that Social Security should be eliminated. This fascinating possibility may be an idea whose time has come. Perhaps it could be blended with the tweaks I've suggested above. In my next column, I'll outline what could happen if Social Security (as we know it) comes to an end.
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