Yet another fleecing: Social Security.
Issues:
1. Social Security taxation rate continues to rise over time. Social security was invoked in 1939. It was set at 2% of income.
Since that time, here are the increases: 1939: 2.0%, 1950: 3.0%, 1956: 4.0%, 2007: 6.2%
Note: 6.2% now also gets contributed by employer for total of 12.4%. Excludes Medicare, Medicaid, etc. Just Social Security.
Observation: The SS tax rate has tripled since SS was initiated in 1939.
2. Cap Increase. In 1951, earnings subjected to SS Tax was $3,600. After the first $3,600 of income, SS tax was no longer applied. Column C, labeled [3] shows the Government’s own index factor to adjust historical earnings to a “Present Value”. For 1951, this factor is a 13.2 multiplier. So, $3,600 (the max income subject to SS tax in 1951 to 1954), in 2006 dollars is $47,520. However, if you scroll down to 2006, that maximum is now $94,200.
This caught my attention. So I added column [1], which shows the year-over-year increase in the “cap”, or the max income subject to SS taxes. A couple items to note in Column [1]
- Prior to 1972, there are a lot of years where the cap stayed constant. In fact, of the 22 years of 1951 to 1971, only 4 years saw an increase in the cap. In the 34 years between 1972 and 2006, the cap increased by 264.1% (even if we treat it as “simple interest”, which it is NOT….it is more similar to “compound interest”), which is an average of 7.77% annually. In the 22 years of 1951 to 1971, it went up a total of 4 times for a total of 86.7%, which over that 22 years averages out to 3.94% per year.
Observation: In the past 36 years since 1972, the “rate of increase” in the cap has doubled.
3. Comparison of SSA benefit versus privately investing those same funds. As a thought experiment, I took a person born in 1951, and assumed he started working at age 18 in 1969, and continued working to age 62 for a retirement in 2013. The total contribution of he and his employer throughout those 44 years was $375,087 if those funds had been placed in a modest savings account earning 3% interest compounded once annually. Then, I used the SSA’s own tabular calculator to figure out what his benefit would be.
I will continue to work the problem as a 62-year-old retiree. Feel free to run the calculations for retirement at age 66, as the results are within 5% of this analysis. So, per Step 7, he would earn $1,276 per month in retirement. The average age of a US citizen as of 2004 is 77 years old (73.6 for men, 79.4 for women). Based on BLS data, it is likely men work more years than women historically, so if I were being realistic I would round the average down to 75 yrs or so. But, to avoid scrutiny I will call it 77.
Our worker collects $1,276 per month for 15 years, for a total of $230,364. But above we figured out his contribution was $375,087. So, where does the delta of $144,723 go???
Stated another way, this person would need to live to be 86.4 years old (12% longer than average) in order to re-coup the money he paid to the Government. As a closely related subject, Russian Roulette carries odds of 1 in 6, or 16.7%.
Observation: Individuals would have a minimum of 38% more money in their retirement if the funds were allowed to be invested in a private bank at 3% interest, instead of allowing the Government to manage this fund.
4. The dis-incentive to over-achieve in a Socialist environment. Then I started to wonder, if a person who earned twice as much (and, accordingly, paid in twice as much to SSA) would then be paid twice as much monthly in his/her retirement. The person in Ex 1 had total lifetime earnings of $1,063,718. See the table below, for a hypothetical person who had lifetime earnings of $2,840,305. Again this person was born in 1951, and retired at age 62 in 2013. The difference is, I sent him to college so he made 60% more than his Ex 1 comrade at age 22. Then I gave him an 8% (versus 6%) pay raise per year.
Then I used the SSA table to figure his benefit.
To summarize:
· Amount paid in by employee and employer with interest at 3%: $684,270 (Ex 1: $375,087). 1.83 times more than Ex 1.
· Monthly SSA payment: $1,588 (Ex 1: $1,280). 1.24 times more than Ex 1.
· So, basically, for every additional dollar you pay in to the account, you will receive 47.6 cents less of a payment, proportionally for that dollar.
· Also, this guy paid in $684,270. But the total benefit for age 62 to 77 is $230,364. Who gets the $453,906? This poor chap would have to be 98 years old to get his money back.
· To cheat the system, since they use the “top 35 years of earnings” in the calculation, this guy could actually quit working for 9 whole years, and still collect the same amount. What would that do to the growth of our economy? Is that Government’s objective or is it an unintended consequence?
Observation: Due to the graduated nature of this SSA tax, the Government dis-incentivizes achievement.
5. The “full retirement age” has increased from 65 to 67.
