Will Social Security Be Around When I Retire?

Happy New Year everyone!!  While on Thanksgiving break, my dad and I had a chance to sit down and discuss all kinds of things about personal finance.  Naturally, our conversation drifted to savings, retirement, and Social Security.  Here’s an email my dad sent me after our discussions where he answers the question: Will Social Security be around when I retire?  My comments to his email are in green below.

 Are the Politicians To Be Believed?

As we spoke about Social Security and retirement you repeated something that I hear very often—that Social Security won’t be around when you reach retirement age.  If Social Securityisn’t around, that would be the least of your worries.  Social Security will collapse after much more important social institutions have fallen to ruin.

Let me explain why Social Security remains secure despite comments made by irresponsible and ignorant bloviators.  Let’s do the math.  Social Security pays to retirees about 30% of what they were paid in their working years.  For each working year, 15% of the worker’s income is paid in Social Security tax.  So, if a worker puts in the expected 40 years, it would mean he has paid for 20 years of retirement at 30% of his earnings (40 years * 15% = 20 years at 30%).  The math checks out 🙂

How Does Inflation Effect Social Security?

Critics say, Yes, but what about inflation?  We know the the Fed has a goal of 2% inflation per year.  Right now inflation is a bit below that.  Remember, inflation is the intentional action of the federal government.  The dollars have little meaning.  What matters is the ratio between one’s income and the GDP.  Your income is a certain per centage (or fraction) of GDP.  Inflation changes both the numerator and denominator of the fraction, but this is meaningless.  Remember how you were taught that this value “one fourth” can be expressed as 1/4 or 2/8 but the value is not changed because the value exists in the ratio of the numerator to the denominator.  That’s how inflation works.  This means that as the economy expands, because the population is growing, all things expand at the same rate.

Social Security Has Less Workers Contributing Today Than It Did in the Past

I know that some claim that when Social Security began there were 10 workers to each retiree and now there will be 2.5.  Again, that doesn’t matter.  When Social Security began in the 30s there was almost instantly a large number of retirees but the ratio between workers and retirees was managed by adjusting the benefits.

Social Security and Cash Flow

What matters is not what happens thirty years hence.  All that matters is a balance between revenue and benefits.  In other words, how much will Social Security pay in benefits in 2014 and how does that balance out with revenue?  If it doesn’t balance, the benefits may be adjusted or the tax may be adjusted.

The absurd belief is that if in all the benefits I receive in retirement amount to $500K, that for Social Security to remain solvent there must be $500K in savings, otherwise Social Security is broke.  Anyone who looks at how insurance companies operate knows this is absurd.  All that matters is cash flow.

Social Security and Government Investing

Then it is argued that Social Security funds should not be “borrowed” by the federal government.  The funds should be invested so that they might grow in order to meet future obligations.  This likewise is absurd.   If the government invests Social Security funds rather than use them for ongoing expenses, how will the federal government be financed?  Well, it could go out on the market and borrow funds by selling bonds.  The cost of interest for the bonds would reduce funds available for use.  The wiser course of action is to create a ledger account and spend the revenue when it is received and continue this policy into perpetuity.

There is one other problem with “investing” Social Security funds.  When the government sells bonds, who purchases the bonds?  Not poor people.  Bonds are bought by the rich.  When the bonds are being serviced, who pays the interest?  Certainly not the rich.  The poor pay the interest.  This amounts to a re-distribution of wealth from the poor to the wealthy.  Yes, the wealthy also have written laws that exempt income from federal bonds being taxed.  How neat is that?  And then, the government has laws which means it cannot sell the bonds directly but must sell them indirectly through banks.  The banks skim fees off the top.  So  again, the poor are robbed.

Social Security and Retirement

When you retire, the value of your retirement will be measured on the basis of a ratio.  Your income will be a fraction of the GDP.  What matters is that the fraction at retirement is close to the fraction that existed during your working years.  Each dollar in your hand is a claim you make against the entire economy.  What does the economy owe you in goods and services for the dollar you have?  Do you have enough dollars to represent the ratio as it presently exists, or will it become a mere fraction.  If it is a mere fraction of what it is now, then the government has screwed you over.

Social Security and Life Expectancy

So back to the funding for Social Security.  Retirement at full benefits has been adjusted from 65 to 67.  The next question is: What is the life expectancy for US males?  Right now, it stands at about 73 (actually 76 according to the link from USA Today).  So, the average worker has twenty years of retirement funds after working forty years.  According to this calculation, the average retiree will have six nine years from retirement to his wooden overcoat.  What will be done with the funds for the remaining thirteen years?

Will Social Security Be Around When I Retire?

Anyone who says Social Security is going broke, won’t be around, etc. is simply a fool—or a liar, or perhaps both,  The government will make adjustments from time to time–always has always will.  But Social Security will be there.  Think about it, Bismark in Germany established Social Security in the 1880s.  Since then, Germany has lost two major wars, gone through incredible political upheaval and deep depression.  Social Security in Germany remains–with much better benefits than are provided here.

Finally, Chile and the UK both decided to permit workers to invest their retirement funds rather than entrust them to the government.  In both countries workers lost money–even when their funds were invested honestly.  Sadly, bankers being what they are, many workers were stolen blind and now the governments are struggling to find a way to make these workers whole.  It will not be easy because really big thieves wear three piece suits and never are made to pay for their crimes.

More on Social Security and If It Will Be There

For more on Social Security and if it will be there for you when you retire, check out these great articles:

• Yes, You Will Get Social Security
• The Future Financial Status of the Social Security System
• Will Social Security Be There For Your Retirement?