Social Security vs Investing Yourself

[Paul F]

In another thread, Doug was lamenting the fact that he has to pay SS taxes and wishes he could have the money himself to invest on his own. I wondered what the outcome would be. I moved my response to the Cafe for general interest.

A good example of why you have to plan for your own retirement funds. Take the money someone was supposed to invest for you and do it yourself.

For 40 years I've wished I could have opted out of the self-employment tax. I can take care of myself and my family, thank you.
When I think of how much more money I'd have in the bank now if I'd been able to invest the hundreds of thousands of dollars I paid to the government (not talking about income tax) for a service I never wanted, it makes me weep into my pillow. Now, as I get closer to being able to collect a very tiny fraction of that money back, I'm going to take every penny I can get even though I won't really need it to live comfortably.

Well, let's have a look and see what really happens with Social Security vs having the money yourself.
By the way, remember, idiots like me, who's spouse didn't earn well, get to have their spouse take an SS income of 1/2 of my SS benefit. So she gets 3x what she would have been paid had she not gotten this ridiculous deal. What a screw job to taxpayers.

Ok, to the facts. I made a spreadsheet using my SS record for a theoretical outcome. I took my Social Security taxes by year and the S&P 500 percentage for each year. I then invested my SS taxes in the S&P 500.

Let's assume a draw rate of 4%, which advisors typically say is the limit of how much to draw from you retirement fund. In that case, had I invested my SS tax money in the S&P 500 instead of taking the annuity from the SS, and drew 4% from that, I would be taking $67,588 per year instead of the $37,284 I get. Don't that make you sick? The gubment can't never do anything well.

I highly recommend that people ignore whatever SS or pension they think they will get -- and plan for retirement yourself. IF that money is there later, then it will be icing on the cake. But make the cake yourself. (I learned about metaphors this week.)

Indeed, that was my plan. You know, a bird in the hand is worth two in the bush. A penny saved is a penny earned. Don't put all your eggs in one basket. A fool and his money are soon parted. Never spend your money before you have it.

 

[Doug Jensen]

I would be taking $67,588 per year instead of the $37,284 I get. Don't that make you sick?

Sure does. And I think your figures are on the conservative side because I've always been able to beat the S&P 500 without taking too many risks. Plus, if/when you die, your entire nest egg would go to your heirs and help them be in even better financial shape when they retire. Not so with SS.

Thanks for crunching your numbers. I don't want to crunch my own. :-(

 

[ahalpert]

The thing is, SS is not a pension. It's just a direct transfer of income from the working age to the elderly.

It's also easy to look back in time and see where the better return was. But if you were Japanese and we were talking about investing in the Nikkei, it would be a different story.

Finally, if you were lower income you would have made a higher return on your SS from the government. It's 90% conversion on the first bit of income, then 32%, then 15%. So I'm guessing that if you were low income and you ran these numbers you would beat your market returns with SS.

But the beauty of a democracy is we can each vote in our self-interest and if the popular tide eventually turns against SS then it will go away.

 

[Doug Jensen]

But the beauty of a democracy is we can each vote in our self-interest and if the popular tide eventually turns against SS then it will go away.

I never said it should go away. A lot of people need to have a nanny watching over them from cradle to grave. I do not. I am an advocate for having the choice to opt out. You're right, though, that it is not a pension. It is just a tax.

 

[Tom Roper]

The thing is, SS is not a pension. It's just a direct transfer of income from the working age to the elderly.

You don't have to be elderly. You can get SSI under the age of 65 if you are disabled. Children and aliens also.

 

[Doug Jensen]

You don't have to be elderly. You can get SSI under the age of 65 if you are disabled. Children and aliens also.

I paid for private disability insurance for more than 20 years. Plus I carried $2M of life insurance while I had kids under 18.

 

[Paul F]

The thing is, SS is not a pension. It's just a direct transfer of income from the working age to the elderly.

What is the significance of this? I get what you are saying about it being more similar to a Ponzi scheme, but is there something further to this comment?

It's also easy to look back in time and see where the better return was. But if you were Japanese and we were talking about investing in the Nikkei, it would be a different story.

Why bring the Nikkei into this? If I was a Japanese citizen, I wouldn't be investing in the Nikkei. I'd be investing in the S&P 500. Or perhaps I would have a different strategy given Japan's culture, regulations, pension, and who knows what else. I don't know.

Finally, if you were lower income you would have made a higher return on your SS from the government. It's 90% conversion on the first bit of income, then 32%, then 15%. So I'm guessing that if you were low income and you ran these numbers you would beat your market returns with SS.

I don't follow Abe. What conversion?
Also, I'm not in a lower income. Why bring that up?

 

[Doug Jensen]

What is the significance of this? I get what you are saying about it being more similar to a Ponzi scheme, but is there something further to this comment?

This had me laughing out loud.

And why can't lower income people invest? All you have to do is spend less than you earn. I was "lower income" for quite a few years myself. But I didn't want to stay that way, so I made some moves. Oh yeah, I also worked my ass off from about age 10 when I got my first paper route.

Not to mention walking uphill both ways to school in a blizzard -- even during summer.

 

[ahalpert]

What is the significance of this? I get what you are saying about it being more similar to a Ponzi scheme, but is there something further to this comment?

The significance is that the money is not being invested. The money you pay into SS doesn't sit around earning a return (except perhaps the trust fund which was created to handle the hump of boomers retiring.) It gets transferred directly to retirees like Paul. So even though it feels like you're making an investment and getting a return and it feels right to compare it to equity returns, that's not what it is. The money is not earning anything. It's not a productive investment. The only increase is from inflation. The first SS recipients paid nothing into it.

Why bring the Nikkei into this? If I was a Japanese citizen, I wouldn't be investing in the Nikkei. I'd be investing in the S&P 500. Or perhaps I would have a different strategy given Japan's culture, regulations, pension, and who knows what else. I don't know.

You're definitely more likely to invest into the equity market of your own country than a foreigner is. But the point is that what happened in Japan could happen here. SS was created out of the great depression, which was caused by a market crash.

I don't follow Abe. What conversion?
Also, I'm not in a lower income. Why bring that up?

What conversion? You get a higher return on social security for the first increment of taxes you pay. Surely you know this. And for poor people, who are the biggest beneficiaries of the program, I'm guessing that their SS "returns" beat their would-be market returns, based on an estimate relative to your self-analysis.

 

[ahalpert]

This had me laughing out loud.

And why can't lower income people invest? All you have to do is spend less than you earn. I was "lower income" for quite a few years myself. But I didn't want to stay that way, so I made some moves. Oh yeah, I also worked my ass off from about age 10 when I got my first paper route.

Not to mention walking uphill both ways to school in a blizzard -- even during summer.

Some people will be public school teachers their whole lives or work at Walmart, etc. It's not just inevitable but necessary. My savings rate has ballooned as my income has increased while my cost of living has largely stayed the same. It's not rocket science.

Yes, it's a nanny state program. Look at the history that preceded its creation and how poor older folks lived back then. Is that what you want to go back to?

 

[Paul F]

The significance is that the money is not being invested.

Ok. I see. Yes, the Federal government, as best I can tell, does not earn any interest on the money it receives. So it is apoor use of the money. It is much better for individuals to invest the money themselves and earn interest. It truly is a Ponzi scheme.

You're definitely more likely to invest into the equity market of your own country than a foreigner is. But the point is that what happened in Japan could happen here.

My spreadsheet shows an investment of 50 years, surviving the 1973-75, 1980, 1981-82, 1990-91, 2001, 2007-2009, and the 2020 recessions. That's as real as it gets. It seems you are looking for a rational on why I should let the government have my money instead of letting me invest it.

You get a higher return on social security for the first increment of taxes you pay. Surely you know this.

I don't understand what you are saying. Really, I'm not playing stupid. I don't understand what you mean. Can you give me an example?

 

[Paul F]

Yes, it's a nanny state program. Look at the history that preceded its creation and how poor older folks lived back then. Is that what you want to go back to?

Neither of us is arguing that some people should have Social Security. Many (most?) do not have the where-with-all to save and invest themselves.

Everybody was poor back then. My grandfather was a sharecropper. He was stuck growing cotton with a one-bottom plow and a mule. It was the typical story you hear. What does that have to do with SS? It's not like SS created a better standard of living for old people. Old people are much better off due to a better economy.

And there were no older folks back then. The average lifespan of a man in 1935 was 59 years.

 

[ahalpert]

Ok. I see. Yes, the Federal government, as best I can tell, does not earn any interest on the money it receives. So it is apoor use of the money. It is much better for individuals to invest the money themselves and earn interest. It truly is a Ponzi scheme.

My spreadsheet shows an investment of 50 years, surviving the 1973-75, 1980, 1981-82, 1990-91, 2001, 2007-2009, and the 2020 recessions. That's as real as it gets. It seems you are looking for a rational on why I should let the government have my money instead of letting me invest it.

I don't understand what you are saying. Really, I'm not playing stupid. I don't understand what you mean. Can you give me an example?

These are the benefits rates for taxed income:

Social Security benefits are calculated using a formula that's similar to a tax bracket, using three segments called "bend points":

• 90%: Of the first $1,174 of averaged indexed monthly earnings (AIME)
• 32%: Of earnings between $1,174 and $7,078
• 15%: Of earnings above $7,078

• In practice this means that if you earn $25k/year you will get approximately half the benefit you would if you earned $100k. This is a program to subsidize poor people.

It's not a poor use of money. The money goes directly to people like you. I can't think of a better use for it.

Of course you'd be better off if you had invested your social security payments instead of giving them to poor old ladies when you were young. Imagine how rich you'd be if you also didn't have to pay for Medicaid or Medicare that whole time. Or the military or public schools. So what?

1929 is as real as it gets. Or even Japan in the 90s. The point I'm making is that social security is a guaranteed return, that's all. That's why it's so good at preventing poverty. And yes, I think you can count on it continuing. Because old folks vote in high numbers. And even if the trust fund were depleted it would pay out 82% or more of benefits because, again, it's a direct transfer of income from the working.

 

[briandrys1]

I don't know the US system, but I suspect state pensions are the same as in the UK. The working people pay for the state pensions of retired people (it doesn't go into a pot), that's not a large amount, but enough to live on. You can then top that up with your personal pension scheme, for when you retire.

 

[ahalpert]

Neither of us is arguing that some people should have Social Security. Many (most?) do not have the where-with-all to save and invest themselves.

Everybody was poor back then. My grandfather was a sharecropper. He was stuck growing cotton with a one-bottom plow and a mule. It was the typical story you hear. What does that have to do with SS? It's not like SS created a better standard of living for old people. Old people are much better off due to a better economy.

And there were no older folks back then. The average lifespan of a man in 1935 was 59 years.

from https://www.afge.org/article/america-before-social-security/ :

• America changed drastically by the end of World War I in 1918. From a primary agricultural society, America became urbanized and industrialized. By the time the Great Depression hit, more Americans depended on wages more than ever before.
• Between 1929 and 1932, national income dropped by 43%. By 1932, unemployment reached 34% for the nonagricultural workforce. 34%!
• By the mid-1930’s, millions of American saw their lifetime savings wiped out.
• At the height of the Depression, many American seniors were in extreme poverty. One-third to one half of seniors depended on family or friends for financial support.
• Relief organizations at the time were mainly financed by charity and local funds and could not even begin to respond to the widespread hardship brought on by the Depression.
• By 1934, even though many states provided a small pension for their seniors – an average of $19.74 a month – states were forced to cut these benefits to spread cash to other programs.
• The conditions were so desperate that the American public demanded a national plan to deal with this serious issue. Several proposals for some form of social insurance were floated.
• In June 1934, President Franklin Roosevelt issued an executive order establishing a Cabinet-level Committee on Economic Security to be chaired by Labor Secretary Frances Perkins, who was tasked with developing long-term proposals to prevent economic insecurity.
• Among other things, the committee developed a proposal for compulsory, contributory insurance for seniors, which became part of the Social Security Act that Roosevelt signed into law in 1935.

from https://www.ssa.gov/history/briefhistory3.html :

A woman in South Carolina scrawls a note to a man in Washington whom she addresses as "Dear Mr. President." "I'm 72 years old and have no one to take care of me." Another letter comes to the White House from Virginia. "I'm a 60 year-old widow greatly in need of medical aid, food and fuel, I pray that you would have pity on me." Letters such as these came by the thousands from old folks across the country to the President, to Mrs. Roosevelt, to almost every one in Washington whose name was familiar to them...

Even before the Depression hit, the States had been forced to deal with the problems of economic security in a wage-based, industrial economy. Workers Compensation programs were established at the state level before Social Security, and there were state welfare programs for the elderly in place before Social Security. Prior to Social Security, the main strategy for providing economic security to the elderly, in the face of the demographic changes discussed above, was to provide various forms of old-age "pensions." These were welfare programs, eligibility for which was based on proof of financial need. By 1934, most states had such "pension" plans. Even at the state level, however, these plans were inadequate. Some had restrictive eligibility criteria which resulted in many of the elderly being unable to qualify. The most generous plan paid a maximum of $1 per day.

 

[Paul F]

"Social Security benefits are calculated using a formula that's similar to a tax bracket, using three segments called "bend points":

• 90%: Of the first $1,174 of averaged indexed monthly earnings (AIME)
• 32%: Of earnings between $1,174 and $7,078
• 15%: Of earnings above $7,078"

Huh, I learned something today. Thanks Abe.

You bet, I want to help the needy. But SS stinks.

Yep, during the depression, my uncle was the only one earning money to keep the family afloat.

Ok, Ok, drifting off to my latest outrage; I can't believe this isn't front page news. Maybe because it's not new news. California publishes detailed information about school performance. In every grade level (1-12), over 60% of the students are getting a D or F in English and Math (74% of 11th graders are getting a D or F). Perhaps other subjects, but those are the ones I looked at. Bloody hell. How do we expect to have these kids fend for themselves with that kind of performance.

I looked at money spent per student - no affect on outcome. I looked at where the schools are located. There was some possible indicators, but not really. I just can't believe California parents are putting up with this. Maybe that's the problem.... They are putting up with it and not speaking up.

 

[Doug Jensen]

Some people will be public school teachers their whole lives or work at Walmart, etc. It's not just inevitable but necessary.

Are you really equating school teachers with Walmart employees? One requires quite a bit of education and dedication, while the other requires a heart beat.

Also, are you saying that somehow teachers don't have the ability to save for their own future? One of my daughters is a K-12 teacher in her mid-20's. She's got a a pretty good nest egg already, which she has funded entirely on her own. What makes you think more people can't do that if they CHOOSE to? All it takes is spending less than you earn and investing the difference. It's not rocket science.

BTW, two of my best friends are former Illinois school teachers who retired about 10 years ago. Their pension gives them 75% of what a current teacher earns, plus benefits. So, between the two of them, they are making 150% of what a current teacher earns. They've got homes in Illinois and Florida. They have a half-million dollar RV, they take about 6-8 luxury cruises every year (more than 100 in total). They are hardly hurting for money -- yet they were teachers. Of course it helps that they never had kids, but still, that's a pretty good retirement.

 

[Doug Jensen]

Ok, Ok, drifting off to my latest outrage; I can't believe this isn't front page news. Maybe because it's not new news. California publishes detailed information about school performance. In every grade level (1-12), over 60% of the students are getting a D or F in English and Math (74% of 11th graders are getting a D or F). Perhaps other subjects, but those are the ones I looked at. Bloody hell. How do we expect to have these kids fend for themselves with that kind of performance.

Grades are arbitrary and don't really matter. Standardized testing reveals what students actually know or don't know. I think you should give credit to California for not just inflating grades to make it seem everything is hunky dory. Grade inflation is a real problem across the country.

In 1950, the average GPA at Harvard was 2.55. Now, it’s closer to 3.80.

Grade Inflation: What Goes Up Must Come Down | Opinion | The Harvard Crimson

The damage of grade inflation has largely been done as there’s no hope of returning to a grading scheme where a C is average. But we can still resolve the growing threat of grade compression before it wreaks further havoc on Harvard’s education. Maybe it’s time for another “Committee on Raising...

www.thecrimson.com

Do you think the students at Harvard are smarter today? Not a chance. I've shot on the Harvard campus many times and I can assure that you most of the students I've interacted with would be lucky to get even 2.55 if they were graded honestly.

 

[ahalpert]

Are you really equating school teachers with Walmart employees? One requires quite a bit of education and dedication, while the other requires a heart beat.

No. I wasn't equating them, I was just saying that neither one earns that much money and some people work those jobs their entire lives. I wasn't trying to denigrate teachers or Walmart employees. You had said that you were lower income but you didn't want to stay that way so you made some moves. Reading your post again, I'm not sure if you were talking about investing your earnings. But when I responded to you I thought you meant that people should just pursue higher-paying jobs.

Also, are you saying that somehow teachers don't have the ability to save for their own future? One of my daughters is a K-12 teacher in her mid-20's. She's got a a pretty good nest egg already, which she has funded entirely on her own. What makes you think more people can't do that if they CHOOSE to? All it takes is spending less than you earn and investing the difference. It's not rocket science.

Sure but it sounds like your issue here is with optionality. Social security operates in practice like saving up a nest egg. You just don't want to be forced to pay into it.

In theory, the department of defense is about defending America, including myself. But in practice... I would rather not be forced to pay into it.

The thing about social security is that it's redistributive. Higher earners such as ourselves are paying lower earners. So, if you look at Paul's numbers and assume that applies to a $100k salary, we can extrapolate that a $25k earner would match their would-be market return had they invested in the s&p instead of paying social security. That's a guaranteed income equal to these terrific stock market returns (some would say bubble) that we currently enjoy. And that's part of the reason that it's not a voluntary program. It's not being administered primarily for your benefit.

BTW, two of my best friends are former Illinois school teachers who retired about 10 years ago. Their pension gives them 75% of what a current teacher earns, plus benefits. So, between the two of them, they are making 150% of what a current teacher earns. They've got homes in Illinois and Florida. They have a half-million dollar RV, they take about 6-8 luxury cruises every year (more than 100 in total). They are hardly hurting for money -- yet they were teachers. Of course it helps that they never had kids, but still, that's a pretty good retirement.

Wow, New York State teacher pensions are complicated. I was just doing some reading to try to understand the ins and outs. It looks like if you teach in NYS for 40 years, your pension will return 1.5-1.75x as much as SS. But that's at the expense of people who don't stay in the career for as long. You're rewarded for your loyalty. People who do the job for less than 21 years receive lower pension benefits per time worked, effectively subsidizing the lifers.

Never having kids sounds like the real secret. My parents were fond of quoting the line from Krippendorf's Tribe where Richard Dreyfuss' son asks him, "How could you squander that much money?" And he replies, "Let's think about this, my little squandees."

 

[ahalpert]

Grades are arbitrary and don't really matter. Standardized testing reveals what students actually know or don't know. I think you should give credit to California for not just inflating grades to make it seem everything is hunky dory. Grade inflation is a real problem across the country.

In 1950, the average GPA at Harvard was 2.55. Now, it’s closer to 3.80.

Grade Inflation: What Goes Up Must Come Down | Opinion | The Harvard Crimson

The damage of grade inflation has largely been done as there’s no hope of returning to a grading scheme where a C is average. But we can still resolve the growing threat of grade compression before it wreaks further havoc on Harvard’s education. Maybe it’s time for another “Committee on Raising...

www.thecrimson.com

Do you think the students at Harvard are smarter today? Not a chance. I've shot on the Harvard campus many times and I can assure that you most of the students I've interacted with would be lucky to get even 2.55 if they were graded honestly.

I don't know much about what's happening with education in California, although my impression is that COVID was a setback for students nationwide, particularly in states that enforced greater restrictions. But to your point about grades vs standardized testing, it does look like CA's standardized test scores are relatively stable: https://caaspp.edsource.org/sbac/california-00000000000000