Further Thoughts on Social Security

Given my emails, I don't think I explained my first point in this post on Social Security very well:

If you are below 50 and in the top 40% of earners, do NOT expect to get
any Social Security benefits.  Live with it.  Up until now, wealthy
people have received SS retirement benefits as an expensive PR campaign
to convince everyone that SS is an insurance program, not a welfare
program.  Well, I have run the numbers, and it is at least 83% welfare.
The only alternative to defending these benefits will be to suffer
through substantial tax increases which will be disproportionately paid
for by the same richest 40% who would lose their benefits.  Given the negative rates of return that SS pays
on your payroll taxes, each extra dollar that taxes are raised will
only yield well under a dollar (present value) in benefits. So give up
on the benefits, campaign to keep taxes down, and start saving on your

Let me try again.  When the crunch comes in a decade or so, the first thing that is going to happen is that the wealthiest people are going to lose their benefits.  Yeah, I know, not fair, but does it surprise you?  For years, Social Security advocates have desperately clung to the argument that Social Security is not welfare, it's insurance.  That is why benefits for the wealthy still exist at all.  But when crunch time comes, the wealthy, as usual, are going to get thrown overboard first.

If you are in the wealthiest 40% or so, here is what it will take to save your Social Security benefits:  New taxes.  These taxes will either be additional payroll taxes or additional income taxes.  If they are payroll taxes, my guess is that the main tax increase will be eliminating the top cap on earnings subject to the tax;  in other words, most of the new payroll taxes will be on the highest earners.  If the new taxes are income taxes, then rest assured that they will be on the top 40% of earners, since it is the top 40% who pay virtually all of the income taxes in this country today.

So, to save your benefits, you are going to have your taxes increased.  And since Social Security, like every government program, is leaky, and since it pays a negative rate of return, you are going to have to pay present value of more than a dollar of taxes to save present value of a dollar of benefits.  That is a bad investment.  If you are still in your productive years, be ready to see your benefits go bye-bye and fight like hell to keep taxes down.  And save, save, save.


  1. Dan:

    I agree with your assessment, but take issue with the tone of one of your statements - "As usual, the wealthy are going to get thrown overboard first."

    You make it sound as if the wealthy are an oppressed class in this country, who give the most but get the least. Well, I happen to be on the wealthy side (not multi-millions wealthy, but doing very well), and I don't feel like I've ever been thrown overboard.

    This country has given my family and me wonderful opportunities and we've taken advantage of them to have a great deal of success. Now we'll give something back. If that means paying higher taxes to keep social security going so that poor elderly people don't starve to death, that's something I can live with.

  2. Bill:

    I agree with your post but also with the first commentator. The wealthy are not really being "thrown overboard." Total taxes for the wealthy are actually much lower than the marginal rates people make such a big deal out of after adjustments, fringe benefits, mortgage payments, etc. Also, the wealthy also get much more value out of many government entities, such as public universities, which relatively wealthy students attend, the state department and embassies, because wealthy people travel more, nicer neighborhoods and quicker responses by emergency services, etc. Note, I'm not making a statement that things shuoldn't be the way they are, I can't think of a better way. All I'm saying is that things aren't really so bad for the wealthy.

    I'm not saying taxes aren't too high either, I'm just saying its not like being thrown overboard, more like being told to stay below deck on Monday afternoons when its really nice out on deck.

  3. kautilya:

    Dan, great if you want to give something back, but please don't expect me be happy if somebody takes my money by force from me-- even if it is for charity. I don't care if you do it yourself or by get goons do it for you (i.e. government)...

  4. Mesa EconoGuy:

    No. You bozos who think that there is some nonexistent social obligation for me to pay for you are out of your economic minds.

    Coyote is absolutely correct in his belief that the wealthy have a major target on their back, especially those of us who are still relatively young and with increasing incomes. We will get shafted, big time.

    Further, the so-called “wealthy” receive next to nothing for their efforts. The Tax Foundation states:

    “Overall, we find that America's lowest-earning one-fifth of households received roughly $8.21 in government spending for each dollar of taxes paid in 2004. Households with middle-incomes received $1.30 per tax dollar, and America's highest-earning households received $0.41. Government spending targeted at the lowest-earning 60 percent of U.S. households is larger than what they paid in federal, state and local taxes. In 2004, between $1.03 trillion and $1.53 trillion was redistributed downward from the two highest income quintiles to the three lowest income quintiles through government taxes and spending policy.”


    I have absolutely no obligation whatsoever to pay for your retirement, especially if you were (and are) irresponsible with your money.

  5. M. Hodak:

    I'm not entirely unsympathetic to the first two commenters, but the notion of "giving back" via taxes really needs to be taken out to the back forty and shot.

    I liken it to the conception that people used to have (and many still have) about praising Jesus. "If it's the right thing to do, why not have a law?" Because, as Jefferson pointed out, threatening sanctions against unbelievers taints everyone's religion. If your neighbor sings in church, is it an expression of piety or fear? If there's a law, one can't know. Part of the genius of the Founding Fathers was their realization that laws of religion potentially subject all religious expression to question. They saw religious freedom as perfecting their ability to express their beliefs.

    A similar argument attaches to "giving back" by way of taxation. Sure, most people don't want to see the poor, especially the elderly poor, suffering. But as it stands now, no one can say that we take care of our poor because of "national compassion" when the threat of violence stands right behind that "compassion." One can argue whether or not our poor would be worse off without transfer payments (I happen to believe they wouldn't be), but one cannot call government transfer payments "giving back" since there is not choice about the "giving," even if much of it may have otherwise been freely given absent coercion.

  6. The Dirty Mac:

    If social security was ever about keeping poor elderly people from starving to death, it certainly hasn't been such in a very very long time. Like all of the other popular entitlement programs, social security has been focused on providing benefits to the middle class. A program directed toward providing sustenance for a small number of elderly who are on the brink of starvation would never have the huge, well financed political machine behind it that we see protecting the social security status quo today.

    I don't agree with Coyote about the more fortunate being jettisoned if and when social security benefits are "cut". I expect any "cuts" to be across the board, with the poor elderly bearing the highest relative cost. I have a hard time envisioning those with the greatest ability and willingness to help fund the massive AARP/progressive political movement being thrown under the bus. And its advocates know damn well that social security's popularity is based largely on the fact that the number of people receiving checks is more or less maximized.

    As an aside, starvation seems to have become a very minor issue in America today. Maybe that fortunate condition is due to transfer payments, but it seems that our market economy is producing ample food for just about everyone. OTOH, I don't expect the imagery of the potential famine among the elderly to go away any time soon.

  7. Dan (not the first guy):

    I'm in my mid-20's, and I view Social Security as a regular old tax that just gets taken out of my paycheck, wasted on some government nonsense, and never to be seen again. And I save accordingly - i.e. under the assumption that no one is going to provide for me when I'm older. Anyone my age who thinks they have to save less, counting up all the money they've paid into social security like it'll be there when they retire, is a huge fool.

  8. Joshua W. Burton:

    If you are currently 35 years old, you will reach age 68 in 2040, the centennial year of SS payouts. In that year, under median current models, proven world oil reserves will be totally exhausted, and SS will be able to pay only about 80% of scheduled benefits.

    Find another Ghawar (no one has, since 1948), and the oil crunch recedes another two years. Lower the unemployment projection by half a percent or so, or raise the retirement age two more years, and SS trust fund depletion recedes past the end of the century.

  9. Dan:

    Joshua, you make a great point. The real crisis isn't government entitlement depletion, it's world oil depletion. I've yet to see the host of this blog acknowledge the possibility that civilization as we know it could well be economically devastated in the next few decades by peak oil. Knowing his "market takes care of everything" philosophy, I doubt he's worried.

  10. Howard:

    Currently, it's my understanding that about half of the working population doesn't pay income taxes. However, everyone pays some sort of consumption tax. These consumption taxes are, for the most part, regressive on the poor such as the Texas State Sales Tax and the Federal Tax on gasoline. Nobody in Texas, at least that I've heard, is complaining about this regressive tax. When we buy someting we expect to pay the tax. If you don't want to pay the tax then don't buy anything. The last sentence is not realistic but at least we have control over when we pay the tax.

    The way we fund the government is purely political. The federal income tax allows politicians to maintain power over the general population. The founding fathers, which so many bloggers are happy to refer to, intended that the federal government be funded through tariffs which may be thought of as sort of sales taxes.

    So, in keeping with the intent of our founding fathers, I think a national sales tax would be the best way of funding ALL government spending, including SS, Medicare, and Medicaid. The poor (either by circumstances or bad planning) would still be taken care of. I think the best way to do this is by adopting the Fair Tax Act and repealing the 16th admendment. Check it out.

    The current Social security System can't be fixed. Nor can Medicare and Medicaid, which dwarf the SS system. The SS system will always remain broken and on the verge of collapse. It is a rob Peter to pay Paul pyramid scheme and as such should be illegal (for the federal government as it is for Joe citizen). Politicians have stolen money from the system with no intent on repaying it. How could they repay except to raise taxes?

  11. JW:

    I'm 45 and I don't expect to see a cent of the roughly $150,000 that has been taken from me in the form of SS taxes during my working life. It pisses me off to no end to think what could have been done with those funds to improve my lot in life, had they not been extracted from and given to someone else to subidize their lifestyle or to someone who didn't lift a finger to plan for their retirement. I'm sure that because of my income, I'll be considered "wealthy," even though in the city I live in, it's anything but. $100,000 in Sioux City isn't the same as $100,000 in NY. It's solidly middle-class.

    The result of having to save 15% of my income to a 401k, on top of the 12% in SS that is already taken from me, is preventing me from improving my kids' lives. We can't afford to live in the neighborhoods with good schools, and as a result, can't afford to send them to even a non-elite private school that will give them a better start than I ever had. Because of the cost of living in this area, a 6-figure income allows you to barely break even and as a bonus, I get to live within a half-mile of high-crime slums.

    I've maintained for a long time now that the Feds can keep every dime they swindeled from me in SS taxes if they allow me to opt out from this point on. I'll never lay claim to it and my kids can now have a property interest in my retirement savings. I'd call that a fair deal.

  12. Gene Hoffman:

    For you flat earthers, I mean peak oilers - I think you should find a market failure in history based on a lack of a raw material. It's not about oil - its about the price of oil. Germany ran out of oil towards the end of World War II and the problem wasn't the lack of oil but the price of the replacements. Google Fischer-Tropsch.

    Why are all men created equal except when I make 10 times as much as you but have to pay 15 times as much as you to the government? I'm willing to certainly except that there is a lower bound where you shouldn't have to pay anything as a reverse income tax but...

    Finally - back on topic - one of the major concerns I have with the doom/gloom version of Social Security/Medicare concerns is that I think the GDP growth numbers used are understated. If we grow the economy around 4% real GDP growth, we'll never have a shortfall and the demographic bubble will pass. That ignores that life expectancy may not increase linearly but start increasing exponentially...