Tuesday, June 21, 2011

Social Security – I’M ENTITLED!

From the Desk of Joe Rollins

Rep. Paul Ryan’s (R-Wisc.) proposed federal budget plan for 2012 is receiving attention from a number of senior protestors who are denouncing his recommended changes to Social Security. This past weekend, quite a few distinguished senior citizens protested Rep. Ryan’s plan. They argued that because they paid into the Social Security system, they are entitled to benefits under the current program.

In my view, this argument is not based on reality since nothing in Paul Ryan’s proposed federal budget changes to Medicare and Medicaid would impact anyone over the age of 55. From the footage of this past weekend’s protest, no one in the crowd appeared to be under that age, and while I respect their passion, I respectfully question where they obtained the facts to form their position.

Because I will soon hit Social Security retirement age, I decided to evaluate my own circumstances regarding the benefits I’ll be entitled to and how long the money I paid in will last. My Social Security benefit statement issued in 2010 reflects my earnings all the way back to my very first job in 1966 when I earned a total of $563. I vividly recall that first job – I raked in a whopping $1.25/hour which was the minimum wage at that time. As a 17-year old, I couldn’t imagine being any richer than I was when I netted $40.40 for a week’s work.

To perform the most accurate calculation regarding the longevity of my Social Security contributions, I had to make a few assumptions regarding my earnings and other important variables. I assumed that all of my contributions to Social Security have earned a total of 3%, compounded annually. Given that one-year Treasury bonds are paying less than one-half of one percent per annum, my assumption may be on the high side.

In addition, I assumed that my employers – which have mostly been my own firms during my professional life – contributed exactly the same amount with the same return. I also assumed that I will begin receiving Social Security retirement benefits at age 66, and that my benefits will increase by 3% each year (commensurate with the rate of inflation). Additionally, for the vast majority of my career, my Social Security earnings record reflects that I contributed the maximum allowable amount each year based upon my earnings.

Based on my earnings record and my calculations, I will have contributed approximately $152,097 to Social Security by the time I turn 66-years old. If my employers have contributed a like amount, then a total of $304,194 will have been contributed under my record when I turn age 66. With the 3% assumed return on the contributed total amount, the total in my Social Security account would be approximately $492,940. And so, using my monthly benefit amount as provided on my Social Security benefit statement – and assuming that the unpaid balance continues to earn 3% – my account would hit zero 17 years after I start collecting benefits. I will be 83-years old at that time, and my children, Joshua and Ava, will be 38 and 22, respectively.

It’s important to note that this example only reflects the retirement benefits I will be collecting from Social Security; it doesn’t reflect any benefits my wife, my children (and my former spouses, for that matter) may be entitled to draw. Additionally, the entire calculation would change if I were to become disabled and had to start drawing Social Security disability insurance benefits at an earlier age.

If my example is consistent with what typical individuals contribute to the Social Security program, then recipients would realistically only be entitled to draw benefits for approximately 17 years after reaching full retirement age if taxpayers were not subsidizing retirement benefits beyond those years.

Taking my example further, let’s assume that the government could earn a minimum of 6% on my account instead of the 3% illustrated above. Additionally, let’s assume that after I retire, any money not distributed to me would continue to earn 6%. My monthly benefit amount would remain exactly as it is indicated on my current Social Security benefit statement. Using these assumptions, my account would never hit zero, and in all likelihood, there would be a balance to share with my fellow taxpayers or bequeath to my heirs at my death.

The above example follows former President George W. Bush’s 2005 proposal to reform the Social Security program through partial privatization of the system. Of course, Congress never enacted any major changes to the Social Security program at that time. Democrats in Congress unanimously opposed Bush’s changes and many Republicans were also unenthusiastic about his proposal.

However, my opinion is that if the U.S. government were to allow independent third parties (i.e., professional money managers) to invest the contributions with the potential to earn a minimum 6% rate of return over time, then Social Security would be fully funded and would actually have excess funds. To my mind, the problem would be solved and there would be no further issues. Since the stock market has averaged well in excess of 6% over the last 100 years, I feel relatively sure that this is doable.

My point in the first illustration is that by the time I reach age 83, I will have utilized 100% of the money contributed to Social Security by my employers and me. After that point and until my death, the taxpayers will have to foot the bill for my monthly benefit amount. Of course, if family/survivor’s/disability benefits come into play, then the account will be extinguished at a faster pace and more of your tax dollars will be required.

There are many ways to fix Social Security: The retirement age could be slowly increased; the method for annual increases could be changed from a wage-based increase to a simple CPI escalator, and/or; by seeking out a higher rate of return for amounts contributed via third parties. The issue is so controversial, however, that it just keeps going round and round in circles without any progress being made towards a resolution. It’s time for our elected officials to appropriately address and fix the Social Security problem, and I would be happy to offer my advice.

As always, the foregoing are my opinions, assumptions and forecasts. It is perfectly possible that I am wrong.

Best regards,
Joe Rollins

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