Social Security: Better Off Putting Your Money in a Cookie Jar

Posted on August 7, 2012


Well, Dad was right.  Way back when I was about nine, he had me sign my Social Security card, and explained what it was all about.  He also explained demographics:  there was some question, even some four decades ago, about whether the fund would survive the crush of the Boomers.   As a kid at the tail end of the Baby Boom, there was a very real possibility that the fund might not be there for me.  “Then I don’t want to pay into it,” I said.  “Can’t I just tell them that I don’t want to pay, and then they don’t have to pay me, either?”  “That’s not how it works,” Dad said.  “You can’t opt out.  It’s the law.”  Funny, though – since Social Security is an entitlement program, Congress can change the rules on you.

Social Security used to be a really, really great deal, back when there were some 17 workers for every retiree.  The Associated Press reports:   “If you retired in 1960, you could expect to get back seven times more in benefits than you paid in Social Security taxes, and more if you were a low-income worker, as long you made it to age 78 for men and 81 for women.”   My grandfather made it to 76.  My grandmother made it to 82.  They had suffered through extreme poverty during the Depression; had lost their property; worked for the Works Progress Administration for a time; and became dependent on my Dad’s financial support during and after WWII.  In short, my grandparents are exactly the folks for whom Social Security was envisioned, and my Dad often sang its praises for what it did for his parents.  But for his kids, there’s that niggling little demographic detail.

Fast-forward to today, and the AP’s research shows that today’s crop of retirees are the first who will, on average, pay more money into the fund than they get out of it.  “A married couple retiring last year after both spouses earned average lifetime wages paid about $598,000 in Social Security taxes during their careers. They can expect to collect about $556,000 in benefits, if the man lives to 82 and the woman lives to 85, according to a 2011 study by the Urban Institute, a Washington think tank.”

So now, not only are most of us not going to recoup the money we paid in, but we have to live longer to have any hope of even coming close.  We actually would have been better off sticking that money into a mattress, provided the house doesn’t burn down.   An average bank account with even the most piddling interest rate would be better than this.  And it’s only going to get worse.  By 2035 there will only be two workers for every retiree.

Having watched my hubby’s 401k shrink to a singularity in the past few years, what with all the market fluctuations, I’m not a fan of “privatizing” Social Security into market-driven funds.  I do wish I could have just been forced to save a certain amount in my own bank account, like an IRA, but that idea has its pitfalls for the current system too, since it would pull available money out of the system and lock it up in private accounts.  No, the system is dependent on new money coming in all the time.  Kind of like a Ponzi scheme.  There are those who will argue that point, but what else should we call a system in which the early investors get the big payouts out of the wallets of the investors coming behind them, and as more investors leave the system and draw their benefits, even more new blood is needed to fund them, ad infinitum?

The only way that this wouldn’t be a Ponzi scheme is if we maintained a balance of variables such that the number of workers per retiree remained constant.  That would mean watching the actuarial tables and constantly  adjusting  retirement age.  The fewer young workers we have, the later and shorter everyone’s retirement would have to be.

Bleah.  I don’t care for that math.  Neither does the government, which is why they are adjusting that other variable instead:  the money.  Fewer workers and more retiree simply means fewer dollars per beneficiary, regardless of how much they paid in.  Since the fund is projected to “dry up” by 2033, at which point payroll taxes could only directly fund about 75% of benefits, it’s obvious that folks in my age bracket – I was born in the 1960s – can expect a greatly diminished return on our “investments.”  I will not be surprised if means testing comes into play and those of us who actually planned ahead will be punished for our foresight by surrendering any hope of seeing our contribution dollars again.

I do see the value of Social Security.  I don’t think the disabled or elderly should just be left to starve.  But it does make me pretty angry that the demographic problem had been long anticipated – remember, my Dad explained this to me forty years ago – and in all those decades, the government has been too incompetent or disinterested to put some common-sense rules in place to better manage the fund and be more fair to everyone, instead of carrying on with a pie-in-the-sky Ponzi scheme that we all knew would crash.

Welcome to the 21st century.  Fasten your seat belts and brace for impact.