Friday, June 28, 2013

The Latest Social Security Internet Hoax Letter

Each month we all get forwarded several emails from people, who diligently forward emails saying "FORWARD THIS TO EVERYONE!" These normally are designed to scare people with hoaxes or less-than-truthful political commentary.  Below is one I just received about the US Social Security system, and I decided to take a few minutes to provide some commentary on the dozens of mistakes contained in the email. covered this, but didn't do a detailed job on it, so, here I go to try to fill in some gaps and do a few calculations, providing references for people wanting to look at the numbers themselves. The original email is in Italics, and my text is non-italicized.
It is unclear what "available Social Security" means here, or what government calculation this might be referring to. In any case, people who die are factored in to the actuarial calculations.  Where that money "goes" is to other beneficiaries. Social Security was never designed as a retirement investment account, but a social insurance program in reaction to so many old people in poverty in the 1930's. The current correct name is "Old Age, Survivors, and Disability Insurance" program (OASDI, for short). What you are paying is a TAX, not a deposit, though you could properly think about it as paying a non-voluntary insurance premium (like ObamaCare? ). If someone dies, then their survivors get benefits (spouse, children under 18 or 19 depending on details, and disabled children over 18).  Also, many disabled people get OASDI-- around 5% of the US population aged 19-64 right now is on this disability program!(citation). Right now (2013) almost 63 million people are getting OASDI benefits (source), compared with 142 million who are actually working (source). That means that there are only two people with jobs paying for each person getting benefits. THERE is what you should be e-mailing everyone about!

Remember, not only did you and I contribute to Social Security but your employer did, too. It totaled 15% of your income before taxes. If you averaged only $30K over your working life, that's close to $220,500. Read that again.
Here we are making the unreasonable assumption that the average person works for 49 years straight (from 16 to 65). The average person spends a lot of this time in school, unemployed, taking care of children, or disabled, and not working and paying in benefits.

Did you see where the Government paid in one single penny? 
That is just silly- the Government has no money except for tax money from workers (and borrowing, future tax money).

We are talking about the money you and your employer put in a Government bank to insure you and I that we would have a retirement check from the money we put in, not the Government.
This money does not get put into a government bank. The system has always been self-funded-- enacted in 1935, it began paying benefits in 1937 as money was just being raised in taxes to pay these benefits. There has never been a pool of money sitting there that people paid in (until the last few decades, when they purposefully started taking in more than they paid out to prepare for the Baby Boomers' retirement.  This money was invested in government bonds-- more on that in a minute.)

Now they are calling the money we put in an entitlement when we reach the age to take it back. If you calculate the future invested value of $4,500 per year (yours & your employer's contribution) at a simple 5% interest (less than what the Government pays on the money that it borrows), after 49 years of working you'd have $892,919.98.
5% is not less than the government pays on money it borrows-- as we all know, interest rates are very low, and the average rate paid right now on all US debt is 2.5% (source). Using this rate, your hypothetical total would be $423,589.82.  However, this number is meaningless-- if you want to start saving $4500 per year when you are 16 so you can end up with $423K at 65, I encourage it!  But the government is not your bank, or your IRA.  Plus, you have to take into account inflation.  People retiring now who are making $30,000 were not making $30,000  in 1964 when they were 16 years old. US Per capita income was $3,423 back then (source), so you weren't paying in the $4,500 per year you are assuming, especially given that the tax rate was only 3.625% then (source), unlike the 7.65% now (double it for the employer match, of course).  So, you didn't pay in nearly as much as you think.

Let's take someone who did work every year, and made the Per Capita Income in every year from 1964-2013 (from 3,423 to $50,000), 50 years of work, and they and their employer paid in the OASDI rate at the time.  With no interest at all, you'd have paid in $169,317.50 if you worked every year constantly from age 15 through 65, earning exactly the per capita income.  Suppose we did deposit this money in a bank every year, and earned 5% on it, beginning with the $248.17 we saved in 1964, and so on.  We would end up with $397,843.10 at the end of 2013. So, $400,000 is probably an overly generous figure, since most people do not work from age 15 to 65 with no breaks, and earning 5% constantly won't happen for most people. (My spreadsheet numbers are at the bottom of this blog post, so you can look at them to see what is going on, if you wish).

If you took out only 3% per year, you'd receive $26,787.60 per year and it would last better than 30 years (until you're 95 if you retire at age 65) and that's with no interest paid on that final amount on deposit!
Nothing is "on deposit", as mentioned previously. Using the more realistic number of $400,000, 3% would be $12,000 per year.

If you bought an annuity and it paid 4% per year, you'd have a lifetime income of $2,976.40 per month. 
$1,333.33 per month.

Another thing with me.... I have two deceased husbands who died in their 50's, (one was 51 and the other one was 59 before one percent of their social security could be drawn. I worked all my life and am drawing 100% on my own social security). Their S.S. money will never have one cent drawn from what they paid into S.S. all their lives.
If this person has two dead husbands, then she is eligible for survivor benefits as early as age 60.  Click HERE for more information.

THE FOLKS IN WASHINGTON HAVE PULLED OFF A BIGGER PONZI SCHEME THAN BERNIE MADOFF EVER DID. Entitlement my foot, I paid cash for my social security insurance! Just because they borrowed the money for other government spending, doesn't make my benefits some kind of charity or handout!!
My red highlighting here-- see, is it insurance, and not a savings account!  The word "entitlement" simply means a guaranteed benefit by law.  It does not mean "handout" or "charity".

Remember Congressional benefits? --- free healthcare, outrageous retirement packages, 67 paid holidays, three weeks paid vacation, unlimited paid sick days. Now that's welfare, and they have the nerve to call my social security retirement payments entitlements?
I actually take the unpopular opinion that congressmen are underpaid, for someone to quit their job, and keep one house back home and a house (apartment, whatever) in Washington, DC.  They certainly don't get paid enough for ME to consider running, think of the huge sacrifices these people make. Even people without skeletons in their closets sometimes have their lives ruined by lies made up by their campaign opponents.  That doesn't mean that I LIKE politicians or anything, far from it.  But, if you want the best and brightest to run the country, how about offering enough to attract them (like some qualified accountants!)?  What do these "paid holidays" and "paid vacation" mean? It just isn't true. These guys must constantly campaign, network, and deal with constituents.  Just because you aren't on the floor of the House doesn't mean you aren't working-- but even if you aren't-- don't people deserve to go home, possibly 3,000 miles away, to see their families and constituents?

We're "broke" and we can't help our own Seniors, Veterans, Orphans, or Homeless. They call Social Security and Medicare an entitlement even though most of us have been paying for it all our working lives, and now, when it's time for us to collect, the government is running out of money.
The word "entitlement" simple means a guaranteed benefit by law.  It does not mean "handout" or "charity".  In any case, what is the rant about?  The government is running out of money, so... what? They are still paying your benefits, and will continue to do so.

Why did the government borrow from it in the first place? It was supposed to be in a locked box, not part of the general fund.
Well, it isn't part of the general fund. Most of the money is spent on benefits to current retirees-- there is just no other way to do it when a program starts paying money to people when the program starts, without having a pool of money that these people paid in.  Plus, it IS insurance-- remember those disabled people? They are around 25% of the total-- these people might pay in just a couple of years, and get benefits from age 25 through 95.  Extra money, called the "Social Security Surplus" is invested in government bonds and held in the Trust Fund (source), which today has almost $3 Trillion in it. Given the steep increase in people claiming disability, this isn't a whole lot of money, but it is about $50,000 per current beneficiary to put it into perspective.

Sad isn't it.  99% of people won't have the guts to forward this. I'm in the 1% -- I just did. 
99% of people aren't brave enough to try to correct the mistakes.  I just did!

Now, let me say again for those that didn't hear it the first time-- None of this means that I love politicians, trust the government, or think that Social Security doesn't have problems. It is just that nothing in this email relates to any of those problems. The real problem is too few people paying in compared to too many people taking out. SIMPLE to understand. Some people are paying in for under 30 years, then expecting benefit from age 65 to 95, getting out more than triple what they paid in. Let me briefly describe a REAL problem that you probably haven't thought about-- how unfair this system is to Black Men (BM) compared to White Women (WW).

Suppose that a BM and WW worked at the same job, got the same pay, for the same years. Whereas 87% of women make it to age 65, only 64% of black men do.  Doesn't that seem a bit unfair?  How about we suppose that 100 BM and WW made it to 65 and then retired.  Well, after 13 years half of the BM would be dead, but only 27% of the WW would be.  And yet, we pay the same monthly benefit to both people, even though we know that the WW will be paid MUCH MORE in benefits than the BM over their lifetimes (or White Males, for that matter).  At age 85, 25 of these 100 BM would still be alive, compared with 47 of the WW. Shouldn't benefits be paid out more fairly?  I leave it up to you.  (Calculations based on the CDC Life Tables)

See my videos on "Death Probabilities" for more information on these kinds of calculations:
Video 1
Video 2

Spreadsheet of calculations is below, for your reference.

Year Nominal PCI FICA Rate "Saved" In "Account" at 5%
1964 $3,423 3.625 248.17 248.17
1965 $3,665 3.625 265.71 526.29
1966 $3,972 4.2 333.65 886.25
1967 $4,152 4.4 365.38 1295.94
1968 $4,491 4.4 395.21 1755.94
1969 $4,803 4.8 461.09 2304.83
1970 $4,998 4.8 479.81 2899.88
1971 $5,360 5.2 557.44 3602.31
1972 $5,836 5.2 606.94 4389.37
1973 $6,462 5.85 756.05 5364.90
1974 $6,948 5.85 812.92 6446.06
1975 $7,517 5.85 879.49 7647.85
1976 $8,297 5.85 970.75 9000.99
1977 $9,143 5.85 1069.73 10520.77
1978 $10,225 6.05 1237.23 12284.03
1979 $11,302 6.13 1385.63 14283.86
1980 $12,180 6.13 1493.27 16491.32
1981 $13,526 6.65 1798.96 19114.85
1982 $13,933 6.7 1867.02 21937.61
1983 $15,000 6.7 2010.00 25044.49
1984 $16,539 6.7 2216.23 28512.94
1985 $17,589 7.05 2480.05 32418.64
1986 $18,427 7.15 2635.06 36674.63
1987 $19,394 7.15 2773.34 41281.70
1988 $20,703 7.51 3109.59 46455.38
1989 $22,039 7.51 3310.26 52088.40
1990 $23,038 7.65 3524.81 58217.64
1991 $23,443 7.65 3586.78 64715.30
1992 $24,411 7.65 3734.88 71685.95
1993 $25,327 7.65 3875.03 79145.28
1994 $26,578 7.65 4066.43 87168.97
1995 $27,559 7.65 4216.53 95743.95
1996 $28,772 7.65 4402.12 104933.26
1997 $30,282 7.65 4633.15 114813.07
1998 $31,687 7.65 4848.11 125401.84
1999 $33,332 7.65 5099.80 136771.73
2000 $35,082 7.65 5367.55 148977.86
2001 $35,912 7.65 5494.54 161921.29
2002 $36,819 7.65 5633.31 175650.66
2003 $38,225 7.65 5848.43 190281.62
2004 $40,292 7.65 6164.68 205960.37
2005 $42,516 7.65 6504.95 222763.34
2006 $44,623 7.65 6827.32 240728.82
2007 $46,349 7.65 7091.40 259856.66
2008 $46,760 7.65 7154.28 280003.78
2009 $45,305 7.65 6931.67 300935.63
2010 $46,612 7.65 7131.64 323114.05
2011 $48,112 7.65 7361.14 346630.89
2012 $50,000 7.65 7650.00 371612.43
2013 $50,000 7.65 7650.00 397843.05
Total  169317.464
The last two PCI are 50,000 by assumption-- 2013 isn't over yet,
and I just chose a simple, reasonable number.

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