Wednesday, November 17, 2010

Let’s Talk About Privatizing Social Security

From its inception, Social Security has been nothing more than a pyramid scheme that does no more than transfer funds from one generation to the next. It does not create wealth or encourage savings or responsibility; it places retired people on nothing more than another mismanaged government program. At least 12.4% of the wages of every American is being funneled into the massive government bureaucracy that sinks deeper by the day.

This program doesn’t give people “security” at all; it puts all of us on welfare.

Imagine if that money were actually yours, and was being invested in a personal IRA, of sorts. Contrary to what those who wish to keep Social Security as a government program say, financial markets have risen steadily over the long-term. Yes, there are peaks and valleys but when these markets are measured in decades; they are a remarkably safe and profitable repository.

I’ve done some rudimentary calculations on a spreadsheet concerning what could be achieved if the money that is currently being shoveled into the system were actually invested as an IRA and benefitted from compounding.

First, Social Security takes 12.4% of your earnings (6.2% from you and 6.2% from your employer). Let’s raise that to 13% (6.5% from you and 6.5% from your employer). This represents a modest 0.3% increase that, I believe, would be well worth it.

Now, let’s start with a 21 year-old individual, beginning his working career at a somewhat low-paying job that pays $25,000 per year, with 6.5% of that going to his/her account and his her/her employer contributing the other 6.5%, for a total of 13% per year.

To make this conservative, suppose this individual stayed at this low-paying job and received an average 1% increase per year (beginning at $25,000 and ending up 45 years later at $38,733). I think that one would agree that this is close to a worst case scenario for most.

Suppose this money were invested in an account that netted an average 6% per year (for the purposes of simple spreadsheet analysis, I added each year’s amount to the cumulative amount and multiplied it by “1.06”). Actually, this is a fairly conservative expectation for long-term investments.

At the end of 45 years of work, this individual has $840,566 on which to retire.

Then suppose that this individual, at 65, proceeds to retire. He/she is restricted to a payment of 80% of their last year’s income (in the case of this individual, they made $38,733, so their first year’s retirement income would be $30,986). That said, each year this individual would receive a 3.5% increase in their annual retirement income to accommodate for inflation. The balance in the account, of course, continues to grow at a rate of 6% per year, after the payment is made.

This individual lives a long life and dies at the ripe old age of 100. That year, he/she has an annual retirement income of $99,803 (it’s been going up 3.5% per year), he/she has been paid a total of $2,065,984 over the course of their 35 years of retirement, and bequeaths $140,833 (the balance of the account) to a designated survivor.

Yes, I made a lot of assumptions and these calculations were done on a spreadsheet. In addition, it does not consider how disability would be handled or any of the other various functions of Social Security. One must also consider how we transition from the current “transfer payment” system we currently have to one that actually creates wealth and financial security.

All of that said, this is designed to begin the conversation, and it’s a conversation that’s desperately needed.

1 comment:

Anonymous said...


Well done.

Read this earlier on Blogmocracy. It's exactly this "question the established norms" thinking that will produce solutions to much of what currently ails our country.

While it's certainly easier for regular folks like us to discuss viable alternatives to the current Social Security system, the only chance we have collectively to affect a change is to elect statesmen with the courage to do as you've done, and consider alternate possibilities that don't involve hocking our grand-childrens' futures to pay for them.

The numbers speak for themselves.