SS calculator: not the usual one

[palomalou]

Is there a calculator on the web that can figure what would have accumulated had our $ that went into SS would have added up to had it been invested in the market all along n the same amounts? I am simply curious.
The discussion is so often "SS is too generous/stingy/targeted to wrong people" etc. etc. And I do feel certain that many people probably wouldn't have invested the money, so I'm not aiming the question to support ending SS.

 

[meierlde]

Your last SS statement gives the amounts that were paid in. You could take your favorite spreadsheet, and put in a growth estimate per year and see what it comes up with. (Take the last year multiply by 1+growth) add this year and repeat as needed. Of course you need to consider in comparison the Surviors and Disablity parts of SS as well as (if married) the potential 50% for the spouse if they don't work.

 

[donheff]

It might be an interesting exercise to see what you "might" have achieved investing similar amounts (your contribution and the employer's) on your own but not of much use in evaluating whether a Government run SS system makes sense. To do that you have to look at all the features - disability, survivor and spouse coverage, inflation guarantee, low income tilt, guaranteed amount. And probably most important for the stability of the society as a whole, nearly universal enforced coverage. Trying to envision a privatized system that offers those features is a whole different calculation. Talking about less demands clarity in the discussion so affected voters know what is at stake. (Yeah, I know - you only want to make a calculation, but it seems like such calculations lead to comparisons and usually shallow ones.)

 

[Brett_Cameron]

It might be an interesting exercise to see what you "might" have achieved investing similar amounts (your contribution and the employer's) on your own but not of much use in evaluating whether a Government run SS system makes sense. To do that you have to look at all the features - disability, survivor and spouse coverage, inflation guarantee, low income tilt, guaranteed amount. And probably most important for the stability of the society as a whole, nearly universal enforced coverage. Trying to envision a privatized system that offers those features is a whole different calculation. Talking about less demands clarity in the discussion so affected voters know what is at stake. (Yeah, I know - you only want to make a calculation, but it seems like such calculations lead to comparisons and usually shallow ones.)

I ran some numbers using my spreadsheet which has my actual earnings since 1973, actual FICA tax rates.
I assumed that both employer's and my contributions are invested, assumed a 5.9% annual rate of return each year and calculated a lump sum value at age 66 assuming I stopped working at age 55.

I took this lump sum and calculated an annual payment with a 1.75% return on the lump sum value for 60 years and came up with 163% of my SS estimated FRA PIA.

This does not account for the possibility that the lump sum might have to fund a family maximum benefit or survivors benefit or disability.

My judgement is that the SS is a good deal and would not want to have had the ability to invest the taxed amount myself.

 

[MasterBlaster]

I ran some numbers using my spreadsheet which has my actual earnings since 1973, actual FICA tax rates.
I assumed that both employer's and my contributions are invested, assumed a 5.9% annual rate of return each year and calculated a lump sum value at age 66 assuming I stopped working at age 55.

I took this lump sum and calculated an annual payment with a 1.75% return on the lump sum value for 60 years and came up with 163% of my SS estimated FRA PIA.

This does not account for the possibility that the lump sum might have to fund a family maximum benefit or survivors benefit or disability.

My judgement is that the SS is a good deal and would not want to have had the ability to invest the taxed amount myself.

Now run your spreadsheet again, and put in historical stock market returns on all your and your employers payments.

Doing an analysis like that will leave you with payments of maybe 4X of what you could get now from SS.

SS never was much of a deal for higher income folks. And I suspect, it will get so much worse before too long.

 

[meierlde]

Now run your spreadsheet again, and put in historical stock market returns on all your and your employers payments.

Doing an analysis like that will leave you with payments of maybe 4X of what you could get now from SS.

SS never was much of a deal for higher income folks. And I suspect, it will get so much worse before too long.

SS was designed as a welfare program to some extent. Look at the benefits formula. 90% of the first 749 of average (indexed) income over the top 35 years of a career, then 33% between 750 and 4517 and 15% above that to the max. In addition given that the program was established during the period of the worst long term performance of stocks since the civil war, it was aimed at safety of returns so to use equity is somewhat of a gamble, in that 1929-1933 could happen again. Agreed that on average the stock market returns about 6% inflation adjusted. What will happen IMHO is the limits on covered earnings will go up with a new bend point so that earnings above the limit pay out at 5%.

 

[Brett_Cameron]

I agree with the 4x for old age benefit using historical stock market returns, not that I am going to run the numbers.

 

[donheff]

Now run your spreadsheet again, and put in historical stock market returns on all your and your employers payments.

Doing an analysis like that will leave you with payments of maybe 4X of what you could get now from SS.

SS never was much of a deal for higher income folks. And I suspect, it will get so much worse before too long.

You are correct but, again, it is misleading to couple this factoid with policy discussions about SS -- or at least policy discussion that focus on whether to privatize it dumping the risk onto individuals. SS is a social safety net program tilted toward supporting low income wage earners and offering guaranteed defined payments with inflation protection, etc. If you want to evaluate the efficacy of SS you have to first decide should we have a social safety net that provides these sorts of benefits. If so, what are the ways to guarantee them? We as a country could set up a SS trust fund that invests in the market but that would have to be backstopped by general funds if things go south. If not (i.e. if proposals to privatize mean that we will not have a guaranteed safety net) we need to be up front about that in the discussion -- like that ever happens.

 

[MichaelB]

It makes no sense to estimate a theoretical SS payout with historical stock market returns. A privately run pension would never invest 100% of pension assets in such a risky way. A better comparison is to take one’s contributions, adjust to reflect the cost of disability insurance and survivor’s benefits, and then adjust once again to reflect the guarantee minimum payment once vested. I have no idea how this turns out but at least it sounds like a more reasonable comparison.

 

[rescueme]

It makes no sense to estimate a theoretical SS payout with historical stock market returns. A privately run pension would never invest 100% of pension assets in such a risky way. A better comparison is to take one’s contributions, adjust to reflect the cost of disability insurance and survivor’s benefits, and then adjust once again to reflect the guarantee minimum payment once vested. I have no idea how this turns out but at least it sounds like a more reasonable comparison.

I agree, but let's make it even more complicated by adding spousal benefits for a "split decision" when one files early and the other claims 50% benefit at FRA, while delaying their claim (not a survivor benefit, since both must be alive to benefit ).

SS was never designed to match a private investment scheme, so why bother? Even if you were to spend the hours needed to run the possible variations, there's no guarantee the market (equity/bond/cash) would return anything close to your estimate.

And if it did show you would possibly be better off by investing on your own, all it would tend to do is drive up your blood pressure, since you have no way of change the program for the forseeable future ...

SS contributions are what they are - a tax for the benefit of others, meaning those that have come before (parents, grandparents). When you get to that stage (and are eligible for SS), hopefully "you'll get yours"...

 

[ziggy29]

Part of the point with SS and pensions is that it takes some of the market risk away at the "cost" of reduced long-term growth potential. When the market is going gangbusters like most of the '80s and '90s, it seems like a terrible deal. But the last 10 years has shown how overreliance on 401Ks and IRAs can bust a lot of retirement planss as well. There's a reason the "three legged stool" approach is usually advised; it adds some growth potential with personal savings in equities with a "safety net" provided by guaranteed income streams. Too many folks today don't have all three legs, and these are the folks least likely to retire. This group is an outlier to the average worker/investor; we have a disproportionate number of pensioners and prodigious savers.

 

[Midpack]

Of course some people get an inferior return on SS received vs SS contributions. Some people get much more than they would have gotten from SS had they invested themselves, so it stands to reason some have to "lose."

Not sure where the equilibrium is today, but I know most people got more than they would have otherwise years ago - normal for the early years of a ponzi scheme (hey, Rick Perry said it before me). Now we're later in the scheme, with demographics no longer working their magic, and we're looking for how to avoid a Madoff moment (and I am sure we will in some manner).

http://www.snopes.com/politics/socialsecurity/changes.asp

 

[youbet]

SS contributions are what they are - a tax for the benefit of others, meaning those that have come before (parents, grandparents). When you get to that stage (and are eligible for SS), hopefully "you'll get yours"...

Sad but true rescueme.

It is unfortunate that demographics must play such a dominant role in the viability of a social safety net system like SS. For boomers and other population peaks, there is real jeapordy that the smaller "paying generations" behind them will not be able to afford the expected benefits.

The misconception that the trust fund comes into play is only for the naive. All SS benefits come from current taxes. Current benefits = FICA taxes from employees and employers + general revenue taxes used to redeem bonds from the so-called trust fund.

There is no point to the question regarding the efficiency of how the money you paid into SS through taxes is being invested. The question is are your current taxes which are being allocated to SS payouts and non-SS current spending being spent as you wish? And, will future generations be willing and able to pay taxes to provide similar benefits for you?

 

[donheff]

The misconception that the trust fund comes into play is only for the naive. All SS benefits come from current taxes. Current benefits = FICA taxes from employees and employers + general revenue taxes used to redeem bonds from the so-called trust fund.

I don't understand what you are getting at. How can the trust fund not be a factor? It is being cashed in as we speak and will continue to be cashed in until 2030 or thereabouts. By then a substantial chunk of the boomers who paid into it will be dead. Now,if your point is that current taxpayers will have to fork up the money the trust fund pumps into the SS checks dollar for dollar, well so what. Those reimbursements to the trust fund are just paying back the unfunded Iraq War and Medicare pills, not paying for current SS benefits.

 

[youbet]

How can the trust fund not be a factor? It is being cashed in as we speak and will continue to be cashed in until 2030 or thereabouts. .

That may be wishful thinking Don. You speak as though "cashing in" the SS trust fund means that someone other than we ourselves is providing the cash to redeem bonds to pay ourselves. The American people are receiving SS checks and the American people are paying fed income taxes to "cash in" the bonds from the SS trust fund to partially fund those SS checks.

The so-called trust fund is just an IOU from ourselves to ourselves. When we want to pay ourselves, we have to tax ourselves.

 

[donheff]

That may be wishful thinking Don. You speak as though "cashing in" the SS trust fund means that someone other than we ourselves is providing the cash to redeem bonds to pay ourselves. The American people are receiving SS checks and the American people are paying fed income taxes to "cash in" the bonds from the SS trust fund to partially fund those SS checks.

The so-called trust fund is just an IOU from ourselves to ourselves. When we want to pay ourselves, we have to tax ourselves.

It is not wishful thinking. Workers built up the trust fund but the entire tax paying base will replace it. Not just the "us" that paid into it. That is proper because the entire tax base borrowed from the fund to pay for wars, etc., just like the entire tax base borrows from the Chinese and other buyers (Treasuries). The fund is not a fiction but I am not naive enough to believe that as part of the tax base I won't have to help pay it back. On the other hand, I will pay back at a much lower rate than I was paying when we cut the tax rates benefiting me over my objection. Just another example of the well to do benefiting from the wrong headed policies we implemented over the past decades.

 

[Midpack]

This again? Semantics...it's a paygo system with diminishing payers relative to recipients.