The millionaire retiree next door.

[clifp]

I thought this piece in the WSJ opinion section was interesting

Readers may recall the 1950s TV show, "The Millionaire," which portrayed stories of individuals who were given a "no strings attached" gift of money by an anonymous benefactor. Each week in one of the show's opening scenes, a man representing the wealthy benefactor, John Beresford Tipton Jr., knocked on an unsuspecting recipient's door and announced: "My name is Michael Anthony and I have a cashier's check for you for one million dollars."
That TV program is scheduled to return next year as a reality show, and the new recipients will be the typical husband and wife who reach age 66 and qualify for Social Security. Starting next year, this typical couple, receiving the average benefit, will begin collecting a combination of cash and health-care entitlement benefits that will total $1 million over their remaining expected lifetime.
According to my calculations based on government data, such married couples will begin receiving monthly Social Security checks that will, on average, total about $550,000 after inflation. They will receive health-care services paid for by Medicare that, on average, will total another $450,000 after inflation. The benefactors will be a generation of younger workers who are trying to support themselves and their families while paying taxes to finance the rest of government spending.
We cannot even remotely afford to make good on these promised benefits. Although our system of personal liberty, free enterprise and limited government has made us an affluent and upwardly mobile people, we are not yet a nation of John Beresford Tiptons.

The rest of article goes on to trace evolution of the dramatic increase in Social Security and Medicare payments. It continues with some partisan comments which in the interest of keeping Porky at bay, I'll avoid.
However, this statistic was pretty interesting.

Many of the million-dollar couples believe they rightfully deserve the benefits they have been promised. They have, after all, spent all of their working years paying into Social Security and Medicare. And true enough, the typical 66-year old couple and their employers, on their behalf, have contributed nearly $500,000 in payroll taxes (in today's dollars) toward these benefits during their working careers

I don't know if I believe this guys statistic but pretty clearly paying in $500K to receive $1 million in benefits is unsustainable.

 

[REWahoo]

I don't know if I believe this guys statistic but pretty clearly paying in $500K to receive $1 million in benefits is unsustainable.

Just a thought: many (most here maybe?) had better returns than that on our 401k/IRA's over our lifetimes...

 

[DoraM]

I don't know if I believe this guys statistic but pretty clearly paying in $500K to receive $1 million in benefits is unsustainable.

A 2% real return will double your money in 35 years. Obviously the 500K was not all contributed at age 30, but then again, you don't get this 1 million dollar benefit age age 65 either. I think you probably need to live until 80ish to get near 1 million in benefits, depending on your healthcare costs?

Also the article says the government has already spent the money, which is not true. The money is tied up mostly in IOU bonds. What happens in the private sector when an entity cannot pay their bonds? Their assets are liquidated. So if you can't pay me my due, then I will take a good chunk of ANWAR as payment and sell it to China, thanks!

 

[Purron]

Just a quick calculation on my trusty HP:

Present value = 0
Future value = $1,000,000
Interest rate = 7%
Number of years = 35
Payment = $7,233.96

So, assuming a rate of 7%, you'd pay $7,233.96 per year for 35 years to get $1 million. Naturally, the interest rate is a big factor.

At 5%, payment = $11,071.71
At 10%, payment = $3,689.71

So, my questions are, what did the couple actually pay per year and what rate of return could have been otherwise obtained over the 35 years they paid into the system? Also, I would assume most would pay less in their early years of work and much more later - this would have a huge impact on the calculation.

Another consideration: say the couple paid nothing into social security and medicare over their working lives and therefore were not entitled to the $1,000,000 in benefits over their expected remaining lifespan. What are the chances we'd end up paying for their care anyway through welfare programs such as Medicaid and food stamps?

No easy answers to this one.

 

[DoraM]

Just a quick calculation on my trusty HP:

Present value = 0
Future value = $1,000,000
Interest rate = 7%
Number of years = 35
Payment = $7,233.96

So, assuming a rate of 7%, you'd pay $7,233.96 per year for 35 years to get $1 million. Naturally, the interest rate is a big factor.

At 5%, payment = $11,071.71
At 10%, payment = $3,689.71

So, my questions are, what did the couple actually pay per year and what rate of return could have been otherwise obtained over the 35 years they paid into the system? Also, I would assume most would pay less in their early years of work and much more later - this would have a huge impact on the calculation.

As a single earner last year, I paid $6621 in SS and $2837 in Medicare, so a total of $9458. I don't have at hand the exact amounts for previous years. Figure that my employer kicked in another $6621 and that puts my payment at $16079. If somehow I sustain that for the next 20 to 25 years, we are not talking about needing much of a return on investment to reach 1 million.

Estimate I have already contributed over $200,000 to SS and medicare over the past 20 years...perhaps more if you count employer portion.

 

[FIREd]

I don't know if I believe this guys statistic but pretty clearly paying in $500K to receive $1 million in benefits is unsustainable.

The system is sustainable if there are more people paying in the $500K than people claiming the $1M benefit (as was the case until recently). The problem is that the huge boomer generation cannot be supported by the much smaller GenX and GenY generations at those levels. Interestingly, the Millenial generation is even larger than the boomer generation, so the system would become sustainable again (for a while at least) once we pass the GenX/GenY bottleneck.

 

[DoraM]

The system is sustainable if there are more people paying in the $500K than people claiming the $1M benefit (as was the case until recently). The problem is that the huge boomer generation cannot be supported by the much smaller GenX and GenY generations at those levels.

So who do you think will sway more votes? The huge non-working boomer generation who actually has time to go to the polls or fill out the mail in ballot or the GenX and GenY generations who don't have time for that sillyness because they are tweeting about their latest bowel movement?

My prediction? GenX and GenY will pay more than the boomers did.

 

[GregLee]

The benefactors will be a generation of younger workers who are trying to support themselves and their families while paying taxes to finance the rest of government spending.

This assumes the budget will be balanced. Who believes that?

 

[Independent]

I'd say that paying $500,000 and getting $1,000,000 is perfectly plausible and sustainable IF you have economic growth.

Here's the basic rule: A purely paygo retirement program with a constant tax rate can provide an apparent "return" to each cohort equal to the growth in the tax base over their working/retired lifetimes.

If the tax base grows about 2.4% per year, and it's about 30 years between the time you pay taxes and the time you receive benefits, then it's not surprising that your benefits would be twice your taxes.

The 2.4% growth could come from either a growing workforce or growing wages.

Unfortunately for SS, our workforce growth rate is slowing. The SS Trustees report has the number of workers increasing by only 0.67% annually for the next 40 years. Benefit formulas that made sense with 1.28% per year don't work when the workforce is growing half that fast.

 

[Nords]

According to the last 56 years of CPI data, today Tipton would have to be known as the "Nearly $8.4 Millionaire".

I think inflation is one of the biggest challenges in assessing Social Security and Medicare. A stream of payments can last for 45 years, and a stream of benefits can last another 30 years. Seven decades of ambiguity can facilitate the crafting of enough scenarios to account for just about any agenda.

I'd have to put together a spreadsheet to truly understand the effect, but putting in $500K and taking out $1M may actually represent a loss.

 

[Tadpole]

It seems to me that it is a matter of how you WANT to present the data. According to the social security site, "The average monthly Social Security benefit for a retired worker was about $1,177 at the beginning of 2011. This amount changes monthly based upon the total amount of all benefits paid and the total number of people receiving benefits." So twice for the couple, if both average. Now how much of a millionaire lives next door if only SS is counted?

 

[GregLee]

Now how much of a millionaire lives next door if only SS is counted?

My wife and I each get $20k from SS, so $40k for both, which would be %4/year of a $1m portfolio. I don't think this should be that uncommon.

 

[haha]

I thought this piece in the WSJ opinion section was interesting
The rest of article goes on to trace evolution of the dramatic increase in Social Security and Medicare payments. It continues with some partisan comments which in the interest of keeping Porky at bay, I'll avoid.
However, this statistic was pretty interesting.



I don't know if I believe this guys statistic but pretty clearly paying in $500K to receive $1 million in benefits is unsustainable.

Please explain why this is clear? Reject compound interest?

Ha

 

[flyfishnevada]

I'd have to put together a spreadsheet to truly understand the effect, but putting in $500K and taking out $1M may actually represent a loss.

That was my first thought, depending on the circumstances, of course.

Now how much of a millionaire lives next door if only SS is counted?

When I was working through the "Your Money or Your Life" book, I figured I had made over a million dollars during my career. That doesn't not make me a millionaire. I spent the vast majority of that. The article is a bit misleading. Receiving a million dollars in benefits over a lifetime does not make one a millionaire. Representing recipients as such is a little slanted.

However, I can agree with the premise. The system as designed is no longer sustainable.

 

[Tadpole]

My wife and I each get $20k from SS, so $40k for both, which would be %4/year of a $1m portfolio. I don't think this should be that uncommon.

I guess that wasn't my point. You have 1666 each or $3333 couple per month. I was just saying that a life style at that income does not produce the same picture to your neighbor as the statement "a millionaire next door" does. The same would be true if you had a $3333/mo income from your 4% withdrawal. No one would view you as the millionaire next door unless you told them your net worth instead of your monthly income.

 

[Bestwifeever]

This story popped up in Yahoo news. I'm imagining my loser sisters and their kids reading this and saying hot damn, we don't have to save for retirement (not that they are), we'll be millionaires!

 

[Tadpole]

I got curious about what size annuity purchase I would need for an increasing annuity with 100% survivor. In my case, in order to produce an income stream equal to my SS benefit at age 66, I would need to purchase a $600,000 annuity, not $1,000,000. I used the TSP calculator which used a rate of 3.5%, the for May 2011.

I don't know how to think about this or whether the comparison is sensible. If I get closer to the average SS benefit the calculator, under the same settings except I set both spouses at age 66, produces $1188/mo for a $320,000 purchase. The major difference I see is that the CPI based increase never will exceed a 3%/year if inflation is higher.

Interesting but does it mean anything?

 

[GregLee]

I got curious about what size annuity purchase I would need for an increasing annuity with 100% survivor.

I get 0% survivor from SS, since my wife and I have approximately equal SS benefits. If one of us dies, the household just loses that 20k income stream.

 

[clifp]

Please explain why this is clear? Reject compound interest?

Ha

The article didn't go into any detail as how the $500K in payments was calculated or the $1,000,000 in expected benefits. My assumption was the $500,000 represents the NPV of stream of payments (FICA and medicare taxes) adjusted for inflation. The million is likewise the NPV of future health care benefits and SS payments also adjusted for medical inflation and wage inflation (both different from CPI).

Since a persons SS and Medicare aren't individually invested but rather used to pay existing benefits of current retirees, I don't see how they benefit from compound interest. Perhaps in the past they did although, the Treasury bills that social security trust fund has invested in the past represent both an asset and liability to the government and should cancel out.

Regardless last year SS benefits payed out exceeded FICA taxes collected by 20-40 billion some 6 years ahead of schedule. The assumptions required to insure that SS Trust fund doesn't run out of money until 2037, require unemployment to drop to 5.5% over the next few years. I am not holding my breath about that.

 

[Texas Proud]

Since a persons SS and Medicare aren't individually invested but rather used to pay existing benefits of current retirees, I don't see how they benefit from compound interest. Perhaps in the past they did although, the Treasury bills that social security trust fund has invested in the past represent both an asset and liability to the government and should cancel out.

Not when you do fund accounting... the SS 'fund' has income and the general 'fund' has an expense... sure, if combined there is a net zero, but gvmt does not work that way...


Just like the cuts that occured a month or so ago were not real cuts.... a lot of them were spending that was passed, but for some reason they were put on hold... the money is not going out the door, but it is still being held for that project that was passed... now, later you pass another law saying that you are not going to spend that money and you can say how much money you are saving.....

Kind of reminds me of a girl I knew a long time ago... she said she would buy 5 dresses and take them home and show her husband.... then take 2 of them back to show how much she saved...

 

[Tadpole]

I get 0% survivor from SS, since my wife and I have approximately equal SS benefits. If one of us dies, the household just loses that 20k income stream.

Well, the rule is the same for everyone. The survivor of all two earner families loses one of the benefits. The winner is a non-working survivor.

 

[Danmar]

I take it that SS is not funded. The Canadian CPP although a much smaller program is fully funded and actuarially sound. Sounds like you need some reform on this big time. Good luck.

 

[Independent]

I take it that SS is not funded. The Canadian CPP although a much smaller program is fully funded and actuarially sound. Sounds like you need some reform on this big time. Good luck.

There are different definitions of "fully funded and actuarially sound".

According to this report from the chief actuary of the CPP http://www.osfi-bsif.gc.ca/app/DocRepository/1/eng/oca/studies/Optimal_Funding_CPP_e.pdf the plan is neither pay-as-you-go nor fully funded.

Unlike the US system, the CPP invests its surplus in real assets. But the total assets aren't adequate to pay the already-accrued benefits.

While looking for information on the CPP, I saw references to the OAS, which appears to be an older paygo program. Maybe Canada is in the middle of a shift from one to the other? or is the expectation that both plans are permanent?

If the US SS old age system were fully funded, it would need assets of about $17 trillion. IIRC, that's in the general neighborhood of the capitalized value of all "US" stocks.

 

[Independent]

The article didn't go into any detail as how the $500K in payments was calculated or the $1,000,000 in expected benefits. My assumption was the $500,000 represents the NPV of stream of payments (FICA and medicare taxes) adjusted for inflation. The million is likewise the NPV of future health care benefits and SS payments also adjusted for medical inflation and wage inflation (both different from CPI).

Since a persons SS and Medicare aren't individually invested but rather used to pay existing benefits of current retirees, I don't see how they benefit from compound interest. Perhaps in the past they did although, the Treasury bills that social security trust fund has invested in the past represent both an asset and liability to the government and should cancel out.
.

I'll agree that a paygo system like SS does not benefit from compound interest. But it does benefit from a growing economy, so it's possible to pay each generation of workers more than they paid in. See post #9.

 

[GregLee]

I'll agree that a paygo system like SS does not benefit from compound interest.

Suppose that payments into the system were not spent immediately but used to buy government issued securities that do pay interest, and payments out of the system were made by redeeming those securities. To account for the fact that more will be paid out in the future than is being paid in now, the interest rate would have to assumed greater than zero. This system would work just as our SS system does now, so far as amounts paid in and out go, but it would be slightly less efficient, because of the accounting work in buying and selling, possibly even printing, the securities. Since the effect is the same, if it's pleasing to think of the SS being funded through interest bearing securities, why not think of it that way? Thus, SS does, in effect, benefit from compound interest.