Social Security: Some Advice

MaxedOutMamma has a pretty good overview post on the economics of funding Social Security and Medicare over the next 30 years or so. 

So the real issue is not
those fictional bonds in the surreal trust fund. The real issue is
whether the American taxpayer will be able to pay for all its current
programs as well as Social Security and Medicare without paying double
or triple the percentage in income taxes the American taxpayer is
paying now. Because that is not going to happen. Forget all this
jibber-jabber about moral issues. That is not going to mean a thing to
the man earning the equivalent of $28,000 today in 2023 when he is
asked to pay much more of that money so that some 67 year old with
several millions of assets can get his or her scheduled Social Security

Nothing really new here, but the picture is always worth reviewing (she has lots of nice graphs showing the coming spending overhang).  Politicians' ignorance of (and ignoring of) this problem would shock me if I had any regard left at all for politicians.   I wanted to offer some random observations:

  1. 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 own.
  2. If you have some control of when you you earn your lifetime income, try to earn as much as you can in the next 10-15 years.  After that, taxes are almost sure to go up substantially.  It would not surprise me to see top marginal rates back well above 50% again.
  3. Democrats in Congress are pushing for new welfare programs, particularly socialized medicine, right now because they must understand that in 10 years, the window for major new spending programs will be closed.  The pressures in a decade will be for program cutbacks as costs really start to balloon, and I can't imagine that new transfer programs will be taken seriously as the old ones eat up a larger and larger part of GDP.  Of course, my point is that this is the last time that such a program would be politically feasible.  From a financial management point of view, we are past the point where adding major new social programs makes any sense.  In fact, adding such a program now would be like a guy who has gotten over his head and knows he can't pay his credit card bills taking his last money out of the bank and buying a plasma TV.


  1. Dale:

    I was pondering just last night the future of SS after reading an article yesterday that says more money will be paid out than is taken in on an annual basis starting in 2017. Then, in 2041, the SS "surplus" will be used up thus it will be deemed "insolvent" at that time. That is laughable since there is no cash sitting in a "surplus" account that is waiting to be tapped which means the SS system goes insolvent in 2017.

    What is scary is the Medicare system reached the point where more is paid out than taken in TWO YEARS AGO! This means money from the general income tax fund is already starting to prop up that failed social program.

    And the Democrats want to pile even more debt and insolvency on the American people with their social medicine (and other) agenda...

  2. tribal elder:

    A growing poulation of retired/retiring citizens now expect THEIR turn to ride on the gravy train they've been paying for. This includes me.

    There are an inadequate number of young taxpayers to fund the gravy train, at least at current tax rates.

    And, as a group, we geezers are gonna ride that gravy train longer (longer lives).

    Politically, America can't cut benefits.

    Politically, there is a limit on how much we can extort from younger Americans.

    Politically, we can't derail the gravy train-after all, a large voter bloc has paid for tickets.

    National healthcare will fix this. It'll shorten the average ride on the gravy train.

    Once we go single-provider, medicine the industry/profession will get less profitable. Docs will work 10-4, M-F. Our healthcare rationers will have to prioritize the limited resources. Since the standard of care will degenerate, there will be less malpractice. People who are net-tax-consumers could be at the end of the line for life-extending procedures and quality-of-life procedures and medications.

    Of course, the key to this is a rigorously enforced single provider system. We've got to be willing to jail doctors and nurses and technicians for 'conspiracy to heal' if they are involved in unapproved treatment.

    I hope I'm off the gravy train before they add the Soylent Green option.

    If I could renounce my SS entitlement, could I free my children from this tax ? I'd go for that, and I suppose they would too. I assume they'd rather send me 6.25% than some nameless, faceless system. Or, maybe they'd just by boats, but at least my grandsons would take me fishing.

  3. Steve:

    I'm 29, and I just love the impact this has on my retirement plans. First, to be conservative, I assume I'll receive no social security benefits, which dramatically increases the amount I need save annually or the time I need to work. Secondly, I think there's a very good chance income tax rates will be a lot higher in the future, so investing in a 401k and Traditional IRA may actually be tax DISadvantaged. I try to counteract this by sheltering some money in Roths and even leaving some in taxable accounts.

    I'm a fairly simple person who doesn't have extravagent tastes, but I guarantee you my current happiness would be noticably higher if I got to deposit 11.68% (12.4 / 1.062) of my salary in my own account, instead of sending it to the gub'mint. I'd have much less uncertainty about my retirement planning and probably be able to triple my expenditures on the occassional fancy dinner, bottle of scotch, or baseball game that I indulge in a couple of times a year.

    I know that lots of others have it a lot worse, but it still pisses me off.

  4. Steve:

    Coyote, your comment verification text/graphic is the hardest I've seen to decipher, bar none. I'm batting about .667 (which is about .500 higher that Gary Sheffield, that bum).

  5. The Dirty Mac:

    "From a financial management point of view, we are past the point where adding major new social programs makes any sense."

    President Bush and the former Republican congress say hello.

  6. markm:

    Re "83% welfare", I think in that post you confounded actual welfare (money transferred from rich to poor) with the normal government inefficiency (money transferred from everyone to gov't officials and/or wasted and lost). To figure the actual percentage that's welfare, you need the formulas for calculating benefits, so thanks to Greg for posting them over there:

    The formula is that your benefits are based on 90% of your monthly income to X, then 32% of your monthly income to Y, then 15% of your monthly income to the cap. X = 680, Y = 4100.

    That is, my last dollar paid into the system gets me 1/6 as much as someone making only $8,000/yr's last dollar, and 1/3 as much as someone making $48,000/yr.[1] Of course, since I'm just a little over "Y", overall I get nearly as much payback per FICA tax dollar put in as the $48,000 worker. So it's up to 5/6 = 83% welfare, but because there's an upper limit to what they tax, the actual overall rate of wealth transfer is far lower than that. Just guessing without digging out numbers and running spreadsheets, about half of (the proportion leftover after government overhead and losses) of what the highest-paid workers put in is transferred to the poorest. Another huge chunk is lost because the government isn't investing the money - not that I'd want a government official deciding where to invest huge amounts like that in commercial bond markets.

    [1] Except that if that $48K earner gets paid bi-weekly, and if they really do their cut-points month by month, twice a year he gets a third monthly paycheck which is mostly going in at the 15% rate, so he gets screwed a little compared to a government worker with the same pay in monthly or bi-monthly paychecks. I think 'Y' is also high enough to cover all but a very few top GS-grades. That cutpoint couldn't be any better for mid-level government workers if they planned it that way. (Draw your own conclusions, I'm making no accusations...)

    Coyote's part year workers are also screwed under the monthly system - if they're working 40 hrs/week at minimum wage for six months, they'd be under the 'X" cutpoint on an annual system, but their monthly paychecks are nearly double it. And I suspect that those who aren't just supplementing their retirement income work longer hours and try to qualify for above minimum wage, so they're losing even more.