Surprising Social Security Analysis

[NanoSour]

So I guess I was bored with the Patriots domination of the Titans this evening and found myself looking at social security. I've heard it said that if you were able to invest the 12.4% on your own, you'd have much more money that the annuity payments provided from social security. So of course I had to see this for myself.

I started from 1982 and median income of $14,210 as published by tax return information for my particular state and county. Then I increased the income by inflation for an ending median income of $52,171 forty-five years later. Assuming the 12.4% was invested in the S&P 500 over those 45 years, you would end up with $881,548 after a total return of 7.34% over that time frame as published by the Schiller S&P calculator.

BTW, I did the same thing for medicare and ended with $206,168 if you got to invest the money yourself.

I then took that income history and input the numbers into ESPlanner to see how much social security you would get after working all those years. Turns out you would received $24,727, or 48.3% of your final annual income prior to collecting SS. Not too bad, and if you throw in a no-working spouse, household SS would be $37,091, or 72.3% of household income. Surprisingly high from what I was expecting for the median income case. I believe these percentages would be higher the lower you go on the income scale. And inversely proportional the higher your household income is.

There is no doubt that a 65 years old you could get very nice annuity with the $881,548; however, I realize that SS is much more than just a retirement supplement, but also provides disability and a significant death benefit along the way to retirement.

I would post the spreadsheet I made for this analysis, but my posting skills are limited.

 

[Cessna152]

As best I can make out from https://www.immediateannuities.com, if the 65 year old retiree then purchases an annuity with that $881,548 they would get a monthly payment for life of approximately $4000 to $4700 give or take, depending on the options selected and gender. On average it looks like the retiree would get the same monthly payments in retirement as their last work salary. Generally a bit more, actually.

 

[pb4uski]

It would be interesting to see how much of a COLAed annuity benefit that one could buy for your $881k, adjusted down for the value of survivor and disability insurance included in the 12.4%.

Just out of curiosity, how much of the $881k was "principal"... contributions and how much was growth?

 

[pb4uski]

As best I can make out from https://www.immediateannuities.com, if the 65 year old retiree then purchases an annuity with that $881,548 they would get a monthly payment for life of approximately $4000 to $4700 give or take, depending on the options selected and gender. On average it looks like the retiree would get the same monthly payments in retirement as their last work salary. Generally a bit more, actually.

But SS benefits are COLA adjusted so a fixed annuity is not a fair comparison. The COLA adjusted annuity benefit would be a lot lower.

 

[Cessna152]

But SS benefits are COLA adjusted so a fixed annuity is not a fair comparison. The COLA adjusted annuity benefit would be a lot lower.

I know - I should have noted that. I couldn’t find any quick way to determine the cost on a Saturday night short of a full quote - just this article: https://www.immediateannuities.com/immediate-annuities/annuities-and-cost-of-living-adjustments.html

 

[Sunset]

Was there a game tonight

Issue is this is a fake comparison, SS is not an investment, it's a tax to redistribute money from the working to the non-working in a planned uneven manner.

It's a fun exercise, but misleads some folks who actually think they have a SS account with their contributions in it.

Might as well compare how soon could I retire if I didn't pay any income tax while working ?

Maybe I should have watched the game

 

[pb4uski]

....SS is ... a tax to redistribute money from the working to the non-working in a planned uneven manner. ...

Sort of ignores that you have to have paid in to SS for 40 quarters in order to receive SS retirement benefits.... and in order to contribute for 40 quarters one needs to have worked 40 quarters...and what you get is a function of what you paid in... although lower earners get a higher percentage than higher earners so there is a small element of redistribution.

 

[gayl]

2 parts to SS distribution: SSA & SSDI/ SSI. No work history required for SSI/SSDI

 

[LOL!]

.... Assuming the 12.4% was invested in the S&P 500 over those 45 years, you would end up with $881,548 after a total return of 7.34% over that time frame as published by the Schiller S&P calculator.

There's the rub. Who is going to be invested 100% in stocks up until the day they start withdrawing from their portfolio?

Also, we know that 1982 was one of the best years to start investing. I started investing more than 12.4% of my income in that year.

I suppose you might want to do something like FIRECalc: Try starting in every historical year and use a 60/40 portfolio and not only 45 years of investing, but 20, 25, 30, 35, ....

Or watch football instead.

 

[btdt22]

......but what happens if you or loved ones die or become disabled?......or the cola'd annuity advantage of social security is included in the calculation, or your housewife's SS benefits when you kick the bucket, or with 100% stocks you choose a down cycle to start?

When to take Social Security is one of those conundrum's that one size does not fit all, or a spreadsheet based on past S&P500 returns is the answer. Between this and the Boglehead's forum, I think 'when to take SS' is the most frequent debate/argument, and it never seems to reach a consensus.

 

[athena53]

Issue is this is a fake comparison, SS is not an investment, it's a tax to redistribute money from the working to the non-working in a planned uneven manner.

I agree with this and have done similar analyses. If I take my contribution plus my employers' and accumulate them at 6%, I'd have had $1.3 million at age 61 when I retired, which would buy me a $9,000/month annuity at age 70. Someone here once mentioned that adding a Survivor benefit would cut that by 20%, so that would be $7,200. That needs to be reduced somewhat because a COLA-adjusted annuity would start at a lower level, but the actual amount of SS I'll get at age 70 is about $3,500/month- before 85% of it gets taxed. I'm subsidizing somebody, somewhere.

If I'd worked to 65, which I'd originally planned, my employers and I would have contributed another $118,000 and it would have increased my payment by $50/month.

Another way to define SS is that it's a forced savings plan with a re-distribution from higher to lower earners.

 

[krwellnitz]

But doesn't your employer also match what you pay into SS. I think the 88100 would be much higher.

 

[Independent]

Issue is this is a fake comparison, SS is not an investment, it's a tax to redistribute money from the working to the non-working in a planned uneven manner.

It's a fun exercise, but misleads some folks who actually think they have a SS account with their contributions in it.

+1

I've already received value for my SS taxes. My mother-in-law didn't live with us. We didn't argue with my wife's siblings about who should support her.

My parents slept better at night. I even inherited a little from my mom, instead of supporting her at the end.

I didn't read about homeless seniors who didn't have enough savings and didn't have kids who could/would support them.

If I'm lucky, the next two generations of taxpayers will do something similar for me (and for themselves).

Yes, it's fun to do the calculation. I've done it, too. But, let's not lose sight of the way the program really works.

 

[Independent]

For people who are interested in these calculations, the Social Security actuaries do them periodically. This is the most recent
https://www.ssa.gov/oact/NOTES/ran7/an2017-7.pdf

They discuss all of their assumptions. That takes a while. Worksheet builders can read that discussion and see what variable they need to consider.

Their output tables show variations by income, single/married, and two-earner/one-earner couples. The directions are what we'd expect.

Unfortunately, their output comes in the form of in/out ratios instead of IRRs. But I expect somebody who is really interested could look at their discussion and build a worksheet for IRRs.


If anyone is interested, I can dig up a paper that proves that a public PAYGO retirement program, with a constant tax rate, can provide an apparent IRR to each cohort of workers equal to the growth rate of the tax base. (Simplifying assumptions required)

 

[Pilot2013]

+1

I've already received value for my SS taxes. My mother-in-law didn't live with us. We didn't argue with my wife's siblings about who should support her.

My parents slept better at night. I even inherited a little from my mom, instead of supporting her at the end.

I didn't read about homeless seniors who didn't have enough savings and didn't have kids who could/would support them.

If I'm lucky, the next two generations of taxpayers will do something similar for me (and for themselves).

Yes, it's fun to do the calculation. I've done it, too. But, let's not lose sight of the way the program really works.

Glad it worked for you, but that is not always the case. Your In-Laws must not have been plagued with health issues requiring LTC. Ours was, and we would have never allowed them to stay in what the measly SS they got would cover.

I think this falls along the lines of the HC debate that was on another thread. SS is primarily for those that will not do what is required to plan for themselves, just as some type of incentive for HI, through increased HI insurance premium would be. To be humane, there will always be a portion of "distribution" associated with that as some will refuse (I am referring to able bodied, not children, elderly and disabled).

 

[Independent]

Sort of ignores that you have to have paid in to SS for 40 quarters in order to receive SS retirement benefits.... and in order to contribute for 40 quarters one needs to have worked 40 quarters...and what you get is a function of what you paid in... although lower earners get a higher percentage than higher earners so there is a small element of redistribution.

I think all of this is covered by the "uneven" in Sunset's post.

IMO, the work requirements and benefit formula were/are mostly about selling the program to a population that was/is very skeptical of "welfare". Make it look something like a private contributory pension plan instead of a public income transfer plan.

 

[Alan]

But doesn't your employer also match what you pay into SS. I think the 88100 would be much higher.

Yes, that is why the OP is using 12.4% which is employee + employer.

 

[Independent]

Glad it worked for you, but that is not always the case. Your In-Laws must not have been plagued with health issues requiring LTC. Ours was, and we would have never allowed them to stay in what the measly SS they got would cover.

I think this falls along the lines of the HC debate that was on another thread. SS is primarily for those that will not do what is required to plan for themselves, just as some type of incentive for HI, through increased HI insurance premium would be. To be humane, there will always be a portion of "distribution" associated with that as some will refuse (I am referring to able bodied, not children, elderly and disabled).

You're correct, none of them did. Even if they had, SS would have reduced the total amount we would have spent on them in their old age. I could dive into Medicare and LTC expenses covered by Medicaid here, but that's off topic.

Yes, I always describe SS retirement benefits as something for the people who couldn't/wouldn't save for retirement. Some working people have such low incomes it's hard to see how they can save. Others have unusual expenses - maybe caring for elderly relatives (if we didn't have SS) or disabled children. Others save but put the money in the "wrong" place.

Of course, others have the opportunity to save and invest and they simply don't take it.

All of these people arrive at old age without adequate savings. I'm okay with taxpayers providing some level of basic income for them. I could go on about my opinions on improving the system we have, but I won't.

 

[athena53]

Yes, I always describe SS retirement benefits as something for the people who couldn't/wouldn't save for retirement. Some working people have such low incomes it's hard to see how they can save. Others have unusual expenses - maybe caring for elderly relatives (if we didn't have SS) or disabled children. Others save but put the money in the "wrong" place.

Of course, others have the opportunity to save and invest and they simply don't take it.

All of these people arrive at old age without adequate savings. I'm okay with taxpayers providing some level of basic income for them.

I agree- it's sad to see how, when articles on SS appear in my FaceBook feed, so many comments are from people living on SS alone and saying how hard it is. I don't doubt it- the numbers they mention are less than I'm getting and I have savings and a couple of small pensions to supplement it. It's not helpful to point out to them that SS was meant to be part of a "3-legged stool", the other parts being personal savings and private pensions, although the latter is quickly disappearing. Add to that the shock when the primary wage earner, traditionally the husband, dies and the household income goes from 150% of the husband's SS benefit to 100%.

There are a lot of programs meant to help people in these situations- subsidized senior housing, Meals on Wheels, etc. but they're not ideal.

 

[pb4uski]

I think all of this is covered by the "uneven" in Sunset's post.

IMO, the work requirements and benefit formula were/are mostly about selling the program to a population that was/is very skeptical of "welfare". Make it look something like a private contributory pension plan instead of a public income transfer plan.

IMO, the work of requirement is more substance than appearance, though I concede there is some redistribution in the design of the bend points, but that aspect is simply an element of "success" insurance.

 

[Chuckanut]

Just to clear things up:

SSI is not part of Social Security. It is a separate welfare program created in the 70's to combine under one roof, the various state and local welfare programs for older and disabled people.

The Supplemental Security Income program is not part of Social Security other than the 'gubmint' takes advantage of SS's large network of offices to manage it.

https://www.creators.com/read/your-social-security/01/17/questions-about-ssi-benefits

Emphasis added......

So let me repeat for maybe the one-thousandth time in this column: Supplemental Security Income is a federal welfare program that just happens to be managed by the Social Security Administration. It is NOT a Social Security benefit and it is NOT funded by Social Security taxes. The money to pay the benefits comes out of the government's general funds. And SSA is even reimbursed from the general funds for the administrative time it takes to run the SSI program.

 

[athena53]

For people who are interested in these calculations, the Social Security actuaries do them periodically. This is the most recent
https://www.ssa.gov/oact/NOTES/ran7/an2017-7.pdf

They discuss all of their assumptions. That takes awhile. Worksheet builders can read that discussion and see what variable they need to consider.

Interesting stuff- thanks! i saved a copy of the PDF.

 

[NanoSour]

OP here. I only did this exercise because I like looking at numbers. There was no judgement going in on the use/purpose of the Social Security program. But if I was to pass judgement, I would say I'm a big proponent of Social Security and its contribution to society as a whole. Absolutely no complaint on what I'll get out of it verses what I've contributed over my 33 years of employment.

Great discussion and educational to boot.

Nano

 

[HFWR]

It’s worth noting that the payroll deduction for most of us wasn’t always 6.2%.

http://payroll.wsu.edu/taxes/hist-oasi.htm

 

[marko]

IMHO spreadsheets (like home gutters) are the invention of the devil, designed to drive one mad.