A HUGE Government Benefit

I had not realized that some Federal employees did not have to participate in Social Security.  Intriguingly, this fact was raised by people who were defending government pay as not being excessive -- they said something like, "well, some workers don't even get Social Security."  Via Bryan Caplan

Some government employees don't participate in Social Security. How does that change the benefits picture?

[T]hat's irrelevant because they're neither paying nor receiving benefits. If you follow Social Security, you know it pays a low rate of return... [N]ot to participate in Social Security is actually a benefit, because they're keeping more.

I agree. Not participating in Social Security is a huge benefit.  The implicit return on "premiums" paid by you and your employer is typically below zero.  In other words, if you took your social security taxes and stuffed them in a mattress, you would get a better return.  As I wrote in the link above

as a retirement program, [social security] is a really, really big RIPOFF.  Ever worker in this country is being raped by this retirement plan.  In fact, it is the worst retirement program in the whole country:

  • As we see above, it pays a negative rate of return
  • It is not optional "“ you go to prison if you choose not to participate
  • Unlike a private annuity contract, the government can rewrite your benefits level any time, and you have to take it.  In fact, my statement says "Your estimated benefits are based on current law.  Congress has made changes to the law in the past and can do so at any time.  The law governing benefit amounts may change because, by 2040, the payroll taxes collected will be enough to pay only about 74 percent of scheduled benefits."
  • There are no assets backing this annuity!!  An insurance company that wrote annuities without any invested assets backing them would be thrown in jail faster than Jeff Skilling.  The government has been doing it for decades.


  1. David:

    Many years ago, so long I forget, the retirement system for federal employees was changed to include Social Security. The bottom line for those like me who were half way through their career was, do I change or not. Not many of the halfers or longer did.
    All new hires after that time had to go into the SSI based retirement. There was of course incentives to change. All employees were given a new investment option, the Thrift Savings Plan. Those going to the new system with SSI could put much more percentage wise of their income, matched by the Feds and all of it non-taxable until withdrawal, into the TSP. This was the carrot to get people to change.

  2. Bob Hawkins:

    Yep. I was hired a few years after the new system became mandatory. The old non-SS system was pretty openly referred to as "the good system."

  3. Dimitri Mariutto:

    Roger that. My mother-in-law works for the federal VA hospital and is a federal employee on 'the good system'. Has never paid into SS and will get a federal pension that is based on her four best salary years at 80%! [or something like that, I forget exactly] She will get like $70,000/annum pension. All of a sudden, I want a federal government job too.

  4. Dr. T:

    I'm not defending Social Security, but I do want to point out that it isn't just a retirement plan. It also is disability insurance and life insurance. However, the disability insurance is abominable: if one can perform any kind of work at all, then one isn't disabled. Thus, if a neurosurgeon suffers a head injury that leaves him with an effective IQ of 50, if he can sweep floors, then he isn't disabled. The life insurance is mediocre: all it provides are contribution-based monthly payments for children until they are 18-years-old.

    The values of those insurances are very low. If you factor them out when making an economic analysis of the retirement component of Social Security, there still is a negative rate of return.

    Our federal government bizarrely expects us to support Social Security: The worst retirement plan in the world, one of the worst disability plans in the nation, and a low-value life insurance plan, too! Other great features: none of your benefits are guaranteed, benefit and eligibility rules can be changed by the government at any time, and if the Ponzi scheme collapses you'll get absolutely nothing despite decades of involuntary contributions!

  5. IgotBupkis, President, United Anarchist Society:

    > The life insurance is mediocre: all it provides are contribution-based monthly payments for children until they are 18-years-old.

    Correction -- 22nd bday if they are enrolled in college, unless that's changed in the 30 years since I did benefit from it while in college. Paid my rent for 4 years, at least.

    I expect that's pretty much just about all I'll ever get out of the system, and it clearly wasn't "mine", but my deceased father's.


    Also -- some or all state-level employees have a similar option. University of Florida workers have an "alternate" system which does not require contributions from them, IIRC.

  6. T Kelly:

    With the right circumstances, SS is somewhat optional. If you live off a trust fund or such, you can work and contribute just enough to qualify for SS benefits and get a great return on your "investment".

  7. DrTorch:

    Interesting. I just got my SS statement last Sat. Coyote's spreadsheet (from his referenced previous post) is gone, so I made my own. Obviously I could tweak the assumptions, but I played it out similar to Warren's.

    Given that I'm a pessimist, I decided not to get the annuity, and just to see how I could live off of the savings itself.

    If I continued to get a 5% compounded return, I could get $4885/month forever. That's slightly more than 2x what the SSA is projecting. Then I'd still have the principle to leave as an inheritance.

    Taking $6000/month, I could go 30 years, and still leave over $250K as an inheritance.

    All that includes the fact that college and grad school I earned very little income that was taxed by SS. So those early years, that allowed for more time to compound, were quite low.

  8. Smitty:

    Back in the mid 80s the federal government changed its retirement system putting all new hires under Social Security plus the Thrift Savings Plan. Old employees were given the option to switch to the new system or keep "the good system". Not being dummies, less than 3% of the old employees changed retirement plans.

  9. ParatrooperJj:

    Employees under CSRS also pay a higher retirement contribution then employees under FERS.

  10. Jeff:

    I believe most public school teachers and certain railroad employees nationwide are exempted from participating in the SS ripoff. That being said, when their union/public pensions go belly up, guess who will come to the rescue?

  11. T J Sawyer:

    "Don't participate in Social Security" is a bit misleading. Going back many years, everyone I knew in my father's generation that worked in civil service found a second job to work in order to get the required (I believe it was) ten quarters in so as to qualify for minimum social security.

    Check the payoff from "minimum" benefits versus the required investment to earn it. It's akin to winning the lottery! LOL

  12. markm:

    MY father in law was a railroad worker on their alternative plan, the RRTA. I don't know how the contributions compare, but it pays a lot better than social security.

    And as TJ says, SS has a pretty good payoff at the bottom end of the earnings scale - which can be achieved with a part-time minimum wage job for 3 months a year for 10 years. Everyone who actually earns their living, and isn't in a politically-favored job, gets ripped off to pay a higher pension to people who only earned pocket money intermittently. SS is not and never was an insurance plan, but a disguised welfare plan.

  13. tomw:

    Anyone who is forced to contribute 15% of their pay for the returns 'granted' by Congrefs through the Social Security Administration *should* feel ripped off. With a normal investment plan, using conservative returns, anyone could be a millionaire and leave a hefty inheritance if they had the option to forgo FICA taxes and invest.
    There must be a plan to get out of the ponzi scheme. I heard the other day on Rush' program from Sowell or Williams that they would tell those 45 and under to give up their claim to anything, pay no more, and invest on their own. They would come out ahead and leave an inheritance... The rest of us oldsters ... no memory of the plan, sorry.

  14. Bill:

    Fair critiques of the social security system, but there are some benefits worth mentioning:

    It is a pretty progressive system, as others have indicated, although not particularly generous, which helps some people sleep better at night and does provide some minimum floor of support. There are some people who would not make any retirement savings without it.

    It ties some portion of retirement income to the assumption that the working-age populace will be engaged in taxable, productive activities, which arguably is more secure than stocks and other securities in the worst of cases. (I opened a Roth account in 1999 with over $2000 in stocks from highschool earnings, it is pushing only $2,500 now, 10 years later. My 401K account while in grad school, invested mostly in stocks, from the summer of 2003 to summer of 2007, returned -5%. My most recent employer 401K account, which I only became eligible for in Summer of 2008, has returned about 1% to date. I did luck out buying some Ford stock when it was selling for $5 on Etrade, but, the point of this all is to show that investing in securities for retirment, at least for the last 10+ years, gives a return almost as bad as social security, and is less secure. Say BP, GM, and Chrysler go belly up and a lot of muni. bonds fail. Private savings of a large number of workers may be dimished by as much as half. Suddenly, the power of the government to tax the young working whipper snappers does not look too bad (anti-government coercion feelings aside). It helps me be a productive part of society, anyway.