Why Social Security is a Rip-Off -- Especially for Higher Income Workers

Yes, I'm on a "bash Social Security" kick lately. I don't know why, I guess it's just something about paying tens of thousands of dollars into something with the hopes of seeing a fraction of it back at best that irks me. Then I see this article on whether or not people can survive on Social Security and I get more irked. In particular, here's the part I dislike:

The "replacement rate" -- how much of a worker's income is replaced by Social Security -- depends on how much you earn:

• For a low-wage earner (average $16,739 annually), Social Security typically replaces 55.9% of your working pay.
• For a medium-wage earner (average $37,198), Social Security typically replaces 41.4% of your working pay.
• For a high-wage earner (average $81,467), Social Security replaces just 28.9% of your working pay.

Being married is better than being single since two checks are, obviously, better than one. Spouses may receive a check based on their own work records or -- if they didn't work or earned less -- checks worth 50% of what their spouses get. That boosts the replacement rate considerably:

• For a low-wage couple, Social Security typically replaces 83.5% of working pay.
• For a medium-wage couple, Social Security typically replaces 61.9% of working pay.
• For a high-wage couple, Social Security replaces 43.3% of working pay.

Ok, so now $81k is a "high wage earner." Soon it's going to be $60k and then $40k. When will the madness end????!!!

Anyway, I'm counting on SS for zippo, but it still depresses me that if I do get anything, it will be only a portion of what I paid in. Seems like I'd be better off with the lottery as a retirement plan.

Before I leave this topic, I have to include one fact that stunned me from this article:

A third of people age 65 or over rely on Social Security for 90% or more of their incomes, the Social Security Administration says. For about one out of five people in that age group, or 22%, Social Security checks are the sole source of income.

This is what I don't want to happen to me or to anyone reading this. Do you want to be at the mercy of Social Security when you retire? Do you want to count on it for all (or almost all) of your income? I'm sure you don't. I certainly don't. That's why I harp (in a kind way) on the importance of saving early and often for retirement. Otherwise, we'll be left to the whim of a system that's on shaky ground and has an uncertain future.

Comments

[Stephen Snyder]

I'll be thrilled if I get back 10% of what I put in. I doubt if I (or any other Gen-Xr's)will see a penny.

[Lord]

If you looked at the income distribution, you wouldn't be surprised at all. What we call the middle class is only the tail end of a distribution that has it's mode among the working poor. This may be the wealthiest country, but even here, most people are poor.

[db]

And even for the poor Social Security is no panacea. My 70-something mom's social security check is just over $400/month.

$400 per month. That's not enough to get by on. Thankfully she has a little something else but that's not much either.

Think about it and save save save.

db

[frank]

Obviously one needs to save, save, and save for retirement and old-age. But as for Social Security, if everyone took the attitude that "I don't expect a dime," the politicians will hear this, and respond accordingly. For the federal government, Social Security funding is a budget priority just like any other, and completely subject to political consideration, as is every budget item. People should be less passive, and more insistent upon their "entitlements," including Social Security.

[Ciji]

Read "Boomsday" In a nutshell, it offers a satirical solution to the baby-boomer/social security problem.

I'm issue has always been that I'm paying into someone else's retirement, not mine.

And it won't matter if the gov't realizes we don't care if SS never gets fixed: they can't fix it anyway. The bullet is lodged to close to the brain and an operation might make it worse.

[Peter]

I've run some projections, and determined that Social Security will provide me with around 30% of my last year's salary. To some that sounds like nothing, but then Social Security was never meant to be the retirement panacea. It was only really designed to provide 1/3 replacement. The other 2/3 should come from personal savings and private pensions. In addition, considering the present value of an inflation protected lifetime annuity, my "contributions" will earn me around 7.2%/year, which is hardly a rip-off. Thanks to the fact that real wages will continue to grow, there is no danger to Social Security except political.

[Terry]

This is quite timely. I received my PEBS today. There is a new sentence in it this time:

"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."

WOW - BIG NEWS FLASH - There may be problems with Social Security. I would laugh if it was not so sad....

[Enough Wealth]

The US social security system appears to be trying to do two different things at once, and not doing either very well. In Australia we have the "aged pension" which provides a basic safety net pension for those who reach retirement age without being able to support themselves. It has fairly generous eligibility criteria - limits on how much income you can be getting from other sources, and on assets (excluding the family home). A couple can still qualify for a "part pension" with a house plus around $800K of other assets.

The aged pension, like the US social security, is basically unfunded and gets paid out of consolidated revenue (ie. current tax payers). We have an even worse problem with the aging of our population reducing the ratio tax-payers to pensioners in the next 20-50 years, so the limits are likely to become more restrictive over time.

At the same time, we have a compulsory "superannuation" scheme that puts 9% of your pre-tax salary (Up to $50K pa) into a personal retirement account, where it gets tax breaks.

This combination of having a means tested aged pension scheme paid for by taxes (ie. using the tax system to make the "rich" help the "poor"), and personal retirement savings accounts where you get to keep what you contribute, and control how it's invested, seems a better mix than the current US social security system.

Unfortunately, reforming the current mix of social security, 401K, IRA, Roth etc. into one sensible, universal retirement scheme will be difficult. Having so many different options already in place means that any reform would adversely affect many voters.

I'm with Peter. I'd just like to add this about personal finance:

What system did we have before Social Security?

Until the 40s, the social contract was that children paid for their parents, as they could. It sometimes worked well, but there were gross inequities with this system. The government institutionalized the system with the new deal. Inequities aren't as bad now, but now kids can be angry with the government instead of their parents.

Now price out an annuity that has survivorship benefits, insurance benefits, and is indexed (to wages not CPI or the market). Then come back with a blog entry.

I do agree with FMF that saving is important. Be sure to read up about market risk before you lean to heavily on stocks. "The Intelligent Asset Allocator", or for a simpler approach, "Risk-Free Investing" should do for a primer on how market fluctuations can seriously impact your retirement. Especially with the possibility of tainted Alpo on the shelves. :)

[Minimum Wage]

Re: pre-Social Security social contract.

Something has long bugged me. (Boy is that an understatement!)

The working poor are told they should not have children they cannot adequately support. Fair enough. But who is (was) supposed to support the working poor when they can no longer work, if they do not have children to support them?

[Lord]

SS will be able to pay out 2/3rds of benefits forever which is what will happen if nothing changes. That 2/3rds will still offer a level greater than todays. It isn't enough, but it is a start.

There are really no true solutions because a society has a very limited ability to store up consumption. What retirees need to live must largely be produced by the working population. Accumulation of assets is largely a myth. Values will inflate during the acquisition phase and will stagnate or deflate during the consumption phase. It can only assure how well you do relative to the rest of society.

[Phil]

Most financial bloggers who bash social security grossly misunderstand its purpose. It is NOT a government-sponsored savings program. Anybody who blogs "I could do way better" or "I'm not going to get back fraction of what I could have made if I had invested that money" shows that misunderstanding. Social Security is an insurance program. What's your return on your home owner's insurance? nil - unless you lose your house. Why don't you just drop your home owner's insurance and just invest the money to build a nest egg large enough to replace your house if you lost it?

Anyway, you can certainly bash Social Security for not being a good insurance program and we all know that there are problems with the system, but please research it and write from the correct basis. This is especially surprising in this blog where you tend to bring in Christian principles. Social Security was instituted to *insure* that no citizen who worked most of his/her life would be suddenly thrown in to a situation of being destitute due to a shift in the economic winds: a motivation that to me seems remarkably consistent with the teachings of Jesus for a govt program.
See http://economistsview.typepad.com/economistsview/2005/04/_social_securit.html
for an nice summary (Economist's view April 5, 2005)

[Suze]

Phil is correct. Social Security is not, and has never been, an personal investment program for retirement. It is a social insurance program. You may not like that fact, but it is true. It was intended to provide a minimum level of income for workers who could not longer work (disabled, retired) and their dependents.

If you look at it as an investment program, calculating how much you put in and how much return you will eventually receive will only annoy you.

I agree that we should all be personally responsible and save. I personally view it as separate from taxes and social security, which I see as social responsibility.

In addition, you pay for a lot of mandated insurance. Home owners, car insurance and you probably pay your employer for health insurance. Yeah, it'd be nice to have all those premiums back to invest as I please. Left to my own devices, would I insure my car or just take the risk of driving without it? I'd take the risk, but I'm not allowed to do that because socially, it would be irresponsible, so I comply.

[FMF]

Wow. Lots of people who love SS here, huh?

I'll go into this in more detail in a later post on SS, what it was originally set up to do, what it's trying to do now (which is the same thing, but the demographics have changed), how the payments have fared over the years, the government's efficiency (or lack thereof) to administer it, etc., but there are a few things I want to respond to right a way:

Phil -- I'm not in disagreement with the IDEA behind SS (in fact, if Christians gave/act as they are supposed to, we wouldn't need SS), just how it's set up currently and administered.

Suze (and others) -- If there's a part of SS that's supposed to come back to me (and I assume there is since I have benefits due at some future point), why can't I at least opt out of that portion of what I pay and choose to go it on my own? In other words, I'd still pay the tax to help others, but forego it for myself. I'd even be willing to prove to the government that I have the financial resources for retirement, etc. and don't need SS for myself.

[Suze]

FMF, I think you are a very socially responsible person. I re-read my post and it came off as a little self-righteous, and I shouldn't be that way.

I don't love Social Security, I probably like it less than you. It's just a fact of life for me, and, I admit, it's been helpful to people I've known in the past, primarily dependents of people who were rather fickle with their money.

But, it should be overhauled, I agree. It's just not fiscally viable for the long term. But it's the third rail and it will take a brave politico to take that on.

[Suze]

FMF, I think you are a very socially responsible person. I re-read my post and it came off as a little self-righteous, and I shouldn't be that way.

I don't love Social Security, I probably like it less than you. It's just a fact of life for me, and, I admit, it's been helpful to people I've known in the past, primarily dependents of people who were rather fickle with their money.

But, it should be overhauled, I agree. It's just not fiscally viable for the long term. But it's the third rail and it will take a brave politico to take that on.

[FMF]

Suze --

Ok, I see where you're coming from.

As I said above, I'll take on this issue in more detail in a future post. And I'll try to be more positive and offer some solutions. ;-)

[EMF]

What Social Security provides is OASDI. What this alphabet soup stands for is
OA = Old Age (retirement, maybe not such a good deal by itself)
S = Survivors (provides for your survivors)
D = Disability
I = Insurance

Any analysis of whether or not Social Security is or is not a good deal needs to account for the Survivors and Disability coverage, not just the retirement aspect. Maybe blacks get on average less retirement benefits, but instead more Survivors and Disability benefits.

Being single, the Survivors insurance is of no value to me personally. But the Disability insurance still applies. And the fact that my parents who have little savings are able to get by on their Old Age benefits without asking me for financial support is a benefit to me as well.

[Livingalmostlarge]

I won't be getting any SS, but that's the price of earning more money. And $81k is high wage earner because the median family income is like $45k. But sure there is nothing we can do about not getting it except to not save for retirement. It'll probably be means based in the future. But we'll be even broke by not saving.

Oh well. This is a catch-22.

[Minimum Wage]

I don't think blacks on average get more Survivors benefits because blacks (esp lower income) have low marriage rates.

I think of SS as a redistributive scheme which benefits the middle class by taking from both ends of the income distribution.

[Glenn P.]

One point people miss in reguards to S.S. & 401k's, is that 401k are the perfect vehicle to kick you off of s.s.Thats right. We thought 401ks' were our savior. In reality, the gov uses them to cut out s.s. benies.The scam works like this:You spend all you working years piling money into your 401k,but because the gov sets most of the rules reguarding 401ks',They control how much goes in,how much come out,and when it comes out. Ever wonder why they force you to take it out? Because its counted as income when does.And you should see what too much income does to your s.s.....If you pass a certain break point of income in retirement, your s.s money gets taxed(read-taken away). 50% at first and it quickly ramps up from there.And as s.s. system starts to get squeezed, the gov can increase that "tax" as high as it needs to to keep the system solvent.You didnt read that in any of the personal finance articles did you?So by saving too much in your 401k, your taking yourself off of s.s.And every penny you dont receive is giving to someone else. Never to grace your bank account again...Sucker!

[mysticaltyger]

I agree with Enough Wealth that our whole retirement system is stupuidly designed. I'm not totally against subsidizing old people so they're not out on the street, provided the benefits aren't too generous. On the other hand, why is it that we have to have 401k, 403b, 457, SEP IRAs, and on and on. What's wrong with one type of 401k with one set of rules? And why not require employers to participate in them and have government subsidies for the administrative costs for small businesses?

What we have now is way too complicated....which is part of the reason why so many people do nothing for their retirement.

Tyger

[Bernard M. Russelman]

Please see my website:

www.socialsecurityisascam.com

AND this link from Dale Steinreich, Ph.D:

http://www.wnd.com/news/article.asp?ARTICLE_ID=16420

How am I supposed to explain how we are being RIPPED OFF by Social Security to the same dolts who voted for Barack Obama and Joe Biden???

If you put your 6.2% of your FICA TAX into mutual funds or just about ANY actual INVESTMENT, even a worker who makes $35,000 all of their life, could have approximately $1 MILLION dollars after they retire.

Try this:

http://www.math.com/students/calculators/source/compound.htm

Years = enter 37 (work from age 18-55, no college degree)

Percent Yield = 9 (not too hard to do when dividends are re-invested, the stock increases in value, and contributions are not withdrawn)

Initial Balance = 0 (My parents could not give me any money, maybe your parents couldn't either...)

Monthly Contribution = 360 ($35,000 salary * .062 = $2170. $2170 / 12 months = $180.83 * 2 (for your employer's match) = $360

Your retirement amount at age 55 would be: $1,276,480.51 (that's correct - $1.2 MILLION dollars

The scumbags in the government take this money, OUR MONEY, OUR PROPERTY!!!, and give it to OTHER people instead of the way the United States is SUPPOSED to be, which is INDIVIDUAL OWNERSHIP of one's money and property.

How am I supposed to convince an Obama voter that even with a few down years in the stock market, I still average 11% annual gain with my ExxonMobil stock?

Why do you think politicians hate ExxonMobil? Because the company will make me (a guy with "just" a High School degree) a very well-off person and I will retire when I am 55. Not working until I am 67 waiting for a few hundred dollars (IF I live to collect it!!!)

After my father waited until he was 62 until he retired so that he could "live" off of his Social Security, because he had no other investments (the 6.2% FICA TAX and 1.4% for MEDICARE TAX took TOO much of my Dad's salary for him to afford to have money to INVEST --- The vicious circle of keeping worker's in poverty - THANKS DEMOCRATS!!!). My dad passed away three years later, and my Mom receives a small portion
of his money, but it is only a few hundred dollars per month. If his FICA TAX was invested and was actually HIS money, he would have left over a million dollars to my Mother, instead of a few hundred dollars per month that is confiscated from OTHER workers.

Obama, Biden, and the rest of the liberals and democrats NEED victims, and what better way to do this then to confiscate 7.5% of our salaries (actually 15% including our employer's match), have the government waste it and then give back crumbs when we get too old to enjoy it.

Do you realize how much money we all LOSE??? It would make all of us millionaires in one generation then we would pass it on to our heirs, unlike the scam of Social Security, which the government says "You are dead, now? Good, now we don't have to pay your family even full "benefits" of a paltry amount of money..."

When George W. Bush mentioned that he would like to take 1/3 of our money and INVEST it, the liberals and democrats jumped all over him and played the old standard line of "Bush hates the elderly. He wants to take their Social Security....”

So now the old folks demand their paltry amounts, and we pay high FICA taxes. When I get old, I will receive my "benefits", but my money will come from today's workers and children who will become workers. They are going to hate us older folks. And I won't blame them.

But I will tell them how it is really the government who ripped them off, just as we were ripped off by the scam of Social Security.

Wake up America. Your sex, drugs, and rock & roll are distracting you from the important things in life. Like liberty, freedom, choice, and a comfortable life after decades of hard work.

America COULD have been a great country, but apathy, lack of intelligence, and ignorance has cost the country greatly.

Hence, Barack Obama has been elected President. He will make your life even worse. Count on it. But he will do it in such a way that you will think it is GOOD FOR YOU!

You could tell your children about this if it is too late for you, but we must eliminate this scam and legalized theft of our personal worth.

Socialism sucks, but it looks like that what America wants when fake "economic crisis" make Americans curl up in the fetal position because they might not get their new IPOD, buy that fancy car, or build the bigger house.

America will pay for the ignorance of something as simple as the scam of Social Security, which was part of our slide into Socialism.

1) Federal Income tax (1913)
2) Social Security (1935)
3) "The Great Society" welfare state (1965)

The knockout punch will be "Universal Health Care" and Obama has the votes to push it down on us. Then it will be over...

[rallen]

It is not a rip off for the poor and middle class! PERIOD.