Would You Take this Deal?

[Independent]

Here’s the deal: You continue to pay Social Security taxes, but you give up your entire SS retirement benefit. Instead, you get a Personal Savings Account which is funded at a rate of 4% of your earnings plus $400 per year. Would you do it?

I’m not making this up. Paul Ryan (R-WI) is looking for the title of “responsible Republican”. He is a serious enough player that his SS proposal was recently “scored” by the SS actuaries, who found that it largely fixes the SS system. They estimated that 50% of workers would take Ryan's voluntary PSA offer.

The offer is actually more complicated than the simple rule above. Anybody currently alive would be in the phase-in period of the plan. So the realistic offer for us is more like this:

- If you turn 55 in 2011, your PSA would only get 1% of earnings plus $100. But, when you retire you would only give up 3% (very approximate) of your retirement benefit.

- If you turn 45 in 2011, your PSA would get the 1% +$100 for the next ten years, then 2%+$200. You’d give up 10% of your retirement benefit.

- 35 year olds would get 1% + $100 for ten years, then 2% + $200 for ten years, then 3% plus $300. They would give up about 23%.

- 25 year olds get the same 1%, 2%, 3% deal, but then 4% and $400 after 30 years. They’d give up about 44% of their benefit.

- Eventually, people entering the workforce after 2042 would be able to get the 4% + $400 for their entire working careers, in exchange for 100% of their retirement benefit.

Note that the base retirement benefit that you’d get in this program would be somewhat smaller than the current law benefit as Ryan would index the retirement age to longevity and partially index initial benefits to the CPI.

So what would you do? Any thoughts on what other people would do?

 

[FinanceDude]

I am sure there are folks who would scream bloody murder at the proposal. However, right now, most folks I talk to under 30 think they will get NO SS at all..........that all the "old folks will suck the well dry"..........

At least Ryan is trying to come up with a solution...most Congresscritters are too busy trying to spend the next trillion we don't have..........

 

[W2R]

I wouldn't take that deal, although I'll be turning 63 in 2011 so I guess it wouldn't affect me personally.

People who are low earners are the ones who need SS just to feed themselves and get a roof over their heads. I wonder if this plan would provide them with enough to do so. Obviously we don't need a class of elderly who worked hard all their lives and are yet dependant upon begging on the streets in their old age, or dying of hunger before our eyes. And we won't because this is not the America we know or want and I do not believe that Americans will allow legislation such as this to pass.

 

[FUEGO]

Just to clarify, one who gets the 4% plus $400 is still being taxed at the current 6.2% tax rate on their earnings, plus the employer pays another 6.2% on their earnings? Or a total tax rate of 12.4%. And the employee gets only 4% plus a flat $400? Anyone who makes more than $5000 a year is getting ripped off over the long term in terms of accumulating retirement assets. $5000/yr equals working roughly 14 hours a week at minimum wage.

I guess today's workers would still get some percentage of the current SS retirement benefit. Is the thinking that those entering the workforce in 2042 would have only a total of 5% or so SS tax on their wages (5% total for employer and employee)?

However I assume some substantially equal form of the SS disability and survivor's benefit would remain in place? That is a much more valuable benefit for most younger workers, particularly those with families. It obviates the need for DW or I to purchase life insurance.

I would probably take the plan laid out above. If I was fairly confident I would get 60-70% or so of my retirement benefits, and have a small personal savings account to boot that was vested solely to me, I'd be feeling pretty good. The current system will be broke before my full SS retirement age, so I would likely benefit from this plan, and it would eventually get us into a more "pay as you go" system that was based on assets in your account instead of some entitlement pyramid scheme that is funded out of the wage taxes from then-current workers.

I would want to see prohibitions on touching this money before retirement age (62, 67, 70, whatever). Maybe a government sponsored/underwritten annuity option and/or a guaranteed return fund like a TIPS money market that pays a fair rate of real return or a G-fund like fed employees have access to.

 

[FIREd]

Here’s the deal: You continue to pay Social Security taxes, but you give up your entire SS retirement benefit. Instead, you get a Personal Savings Account which is funded at a rate of 4% of your earnings plus $400 per year. Would you do it?

I don't understand. Who is supposed to fund that personal savings account? Is is funded with part of the 6.2% the worker pays in SS taxes?

 

[Independent]

Just to clarify, one who gets the 4% plus $400 is still being taxed at the current 6.2% tax rate on their earnings, plus the employer pays another 6.2% on their earnings? Or a total tax rate of 12.4%. And the employee gets only 4% plus a flat $400?

Correct. People who opt for the PSA do not get all their taxes back. Presumably, that money goes to older people who are still getting traditional benefits. After many many years (somewhere beyond the 75 years in the SS projection horizon) you can imagine tax rates going down.

Anyone who makes more than $5000 a year is getting ripped off over the long term in terms of accumulating retirement assets. $5000/yr equals working roughly 14 hours a week at minimum wage.

I guess today's workers would still get some percentage of the current SS retirement benefit. Is the thinking that those entering the workforce in 2042 would have only a total of 5% or so SS tax on their wages (5% total for employer and employee)?

No. See above.

However I assume some substantially equal form of the SS disability and survivor's benefit would remain in place? That is a much more valuable benefit for most younger workers, particularly those with families. It obviates the need for DW or I to purchase life insurance.

Correct. The reduction is on retirement benefits only. Disability and "young" survivors benefits continue.

I would probably take the plan laid out above. If I was fairly confident I would get 60-70% or so of my retirement benefits, and have a small personal savings account to boot that was vested solely to me, I'd be feeling pretty good.

I'm not sure where you are getting the 60-70%?

The current system will be broke before my full SS retirement age, so I would likely benefit from this plan, and it would eventually get us into a more "pay as you go" system that was based on assets in your account instead of some entitlement pyramid scheme that is funded out of the wage taxes from then-current workers.

Under the Ryan plan, benefits on the traditional SS are reduced somewhat so that it will never "go broke". You would be giving up a real benefit in exchange for the PSA.

I would want to see prohibitions on touching this money before retirement age (62, 67, 70, whatever). Maybe a government sponsored/underwritten annuity option and/or a guaranteed return fund like a TIPS money market that pays a fair rate of real return or a G-fund like fed employees have access to.

There would be a side guarantee of CPI + 0%. The first X dollars of your fund would be required to be put into a CPI linked annuity. There is a gov't securities fund, but if you take it and it yields CPI+3% I'm pretty sure that you come out behind (I haven't done the math yet).

 

[Independent]

Sorry, I forgot the link to the Social Security actuaries report: http://www.ssa.gov/OACT/solvency/PRyan_20100427.pdf

 

[Independent]

I don't understand. Who is supposed to fund that personal savings account? Is is funded with part of the 6.2% the worker pays in SS taxes?

IMO (and I think people would debate this) it's funded entirely by borrowing. Eventually, the borrowing is paid back by the forfeited benefits. It appears that, if the gov't can borrow at CPI + 2.9%, the SS system eventually comes out comfortably ahead. If that's true, individuals need to average significantly more than CPI + 2.9% in order to break even. (I haven't checked.)

 

[FUEGO]

I'm not sure where you are getting the 60-70%? Under the Ryan plan, benefits on the traditional SS are reduced somewhat so that it will never "go broke". You would be giving up a real benefit in exchange for the PSA.

60-70% of my original benefit is what I would expect to get under the Ryan plan based on my age.

 

[Independent]

60-70% of my original benefit is what I would expect to get under the Ryan plan based on my age.

Okay. You'd be in the group that gets 1% for 10 years, 2% for 10, 3% for 10, then 4% for less than 10.

I've done a little math and the PSA looks a more appealing than I had expected.

 

[FUEGO]

Okay. You'd be in the group that gets 1% for 10 years, 2% for 10, 3% for 10, then 4% for less than 10.

I've done a little math and the PSA looks a more appealing than I had expected.

Except I personally would only get 1% for 10 years, since I really don't plan on working more than 10 years from now. Wonder if that $400 gets contributed regardless of your working status? If so this is sounding better and better! If not, I could always "earn" $50 from self-employment income, pay my 15.3% self employment tax, and get a $400 SS PSA contribution. Win, win, win!

 

[ziggy29]

Sounds like the numbers might only be favorable if you w*rk well into your 60s. I think the PSA concept as described here would hurt people who retired at (say) 55 a lot more than under the SS status quo.

 

[Texas Proud]

No.... because I don't plan on working long enough to get a good enough sized account...

IF you make $100K per year... you would have a whopping $11,000 after 10 years (I don't see where you get income... but I did not read the link yet)... but even if you did... say you got great returns and now had a total of $22,000...

WELLLL.... I did the calc and it says with $22k you can have an annuity of $137 starting at 62... but if I only have the $11K... then I am back to 'even' with SS payments...

NOW... if you really want to make it interesting... give me the 4% per year back to when I first started paying in... and I might have to look at that one...

 

[FUEGO]

Sounds like the numbers might only be favorable if you w*rk well into your 60s. I think the PSA concept as described here would hurt people who retired at (say) 55 a lot more than under the SS status quo.

I don't know, it might be favorable to the status quo regardless of when you retire. I wouldn't expect 60-70% of today's promised benefits in the 2040's when I retire. If the Ryan plan makes the SS system solvent, and I expect to get 60-70% of today's promised benefits, that's about as good as I could hope for under most scenarios of SS going broke and being rejiggered later.

But if you are saying those younger workers who work to 65 would benefit more under the Ryan plan versus those ERing at 45 or 55, then I agree. The younger worker ER's would never see the golden years of 3-4% contributions.

 

[FinanceDude]

But if you are saying those younger workers who work to 65 would benefit more under the Ryan plan versus those ERing at 45 or 55, then I agree. The younger worker ER's would never see the golden years of 3-4% contributions.

Agreed, but most folks on here don't use their SS as a primary funding mechanism, but rather heavy saving and/or a pension..........

Ryan obviously knows that if millions of folks stop working at 45 or 55, the system fails no matter what.........

I doubt that will happen..........

 

[kyounge1956]

I will turn 55 in 2011, so my PSA would only get 1% of earnings plus $100 and my eventual SS benefit would be reduced by 3%. Since I plan to retire in three years, the total that goes into my PSA would be 3% plus $300, which would earn at least CPI until I reach retirement age. I assume my eventual balance would be so small I'd be required to annuitize it. My projected SS benefit at full retirement age, if I retire as planned, would be very roughly, $2000 a month, so the reduction would be ~$60 a month or $720 a year. If I can buy an annuity that pays $720/year or more, it's a good deal for me. Have I got that right?

 

[Texas Proud]

I will turn 55 in 2011, so my PSA would only get 1% of earnings plus $100 and my eventual SS benefit would be reduced by 3%. Since I plan to retire in three years, the total that goes into my PSA would be 3% plus $300, which would earn at least CPI until I reach retirement age. I assume my eventual balance would be so small I'd be required to annuitize it. My projected SS benefit at full retirement age, if I retire as planned, would be very roughly, $2000 a month, so the reduction would be ~$60 a month or $720 a year. If I can buy an annuity that pays $720/year or more, it's a good deal for me. Have I got that right?

In a way... yes... but you need to buy an annuity that increases with inflation because SS does...

 

[Gone4Good]

This is very similar to the reform George Bush tried to implement. It failed because the transition costs are huge and most folks didn't see a "savings or investment account" as a good alternative to a government funded pension.

 

[cardude]

I've got a SS question:

I quit working back in 2008 and I'm 45. When I quit I got a statement that said I had enough credits to qualify for the maximum payment amount of $2500/mo or something like that.

However, if I don't work and pay in any SS tax over the next 17 years will I still get that max benefit or will it drop, assume the rules stay like they are now (which they probably will not)?

 

[REWahoo]

I've got a SS question:

I quit working back in 2008 and I'm 45. When I quit I got a statement that said I had enough credits to qualify for the maximum payment amount of $2500/mo or something like that.

However, if I don't work and pay in any SS tax over the next 17 years will I still get that max benefit or will it drop, assume the rules stay like they are now (which they probably will not)?

Assuming the rules don't change there will be very little reduction to your expected benefit due to not paying into SS from now until you begin drawing.

To confirm this is go to the SSA.gov website and plug your numbers from your statement into their calculator showing zero income going forward. I think you'll find the reduction in expected monthly SS benefits is less than $200.

 

[REWahoo]

Here is a recent thread discussing the same subject: http://www.early-retirement.org/forums/f27/social-security-question-49938.html

 

[donheff]

This is very similar to the reform George Bush tried to implement. It failed because the transition costs are huge and most folks didn't see a "savings or investment account" as a good alternative to a government funded pension.

It is an interesting plan but it would require a commitment on the part of the country to let people who blow their PSAs suck rocks in old age without even the minimal safety net of SS. It is a tough call on whether that would be good or bad.

 

[Independent]

Except I personally would only get 1% for 10 years, since I really don't plan on working more than 10 years from now. Wonder if that $400 gets contributed regardless of your working status? If so this is sounding better and better! If not, I could always "earn" $50 from self-employment income, pay my 15.3% self employment tax, and get a $400 SS PSA contribution. Win, win, win!

Sorry, I took a shortcut. The actual proposal is 8% of the first $10,000 of income and 4% of the excess. That's pretty wordy, so I shortened it to 4% + $400 because I figured everyone here makes at least $10,000 annually.

Similarly, note that Ryan's proposal makes SS solvent partially by reducing benefits. So it would be 60-70% of the reduced benefit. The big reduction is the "progressive indexing" which hits high income workers but not low income workers.

 

[Independent]

I will turn 55 in 2011, so my PSA would only get 1% of earnings plus $100 and my eventual SS benefit would be reduced by 3%. Since I plan to retire in three years, the total that goes into my PSA would be 3% plus $300, which would earn at least CPI until I reach retirement age. I assume my eventual balance would be so small I'd be required to annuitize it. My projected SS benefit at full retirement age, if I retire as planned, would be very roughly, $2000 a month, so the reduction would be ~$60 a month or $720 a year. If I can buy an annuity that pays $720/year or more, it's a good deal for me. Have I got that right?

You've got everything right, but I calculated the 3% based on the assumption that people would work till 66. Thinking about it, a bad assumption for this board.

The wording is

the benefit reduction would be equal to the scheduled OASI basic benefits under the plan multiplied by the ratio of (a) the present value of all contributions redirected to the worker’s PSA, to (b) the present value of all potential PSA contributions that might have been made if the plan had been in existence throughout the working lifetime of the worker with the contribution rate at the ultimate level of 8/4 percent.

So if you get 1% during the last 3 years of your working career, the reduction is more like 1% of your benefit.

 

[growing_older]

I quit working back in 2008 and I'm 45. When I quit I got a statement that said I had enough credits to qualify for the maximum payment amount of $2500/mo or something like that.

As I understand the rules, this is not possible. Many SS statements project your current earnings into the future, then estimate you benefit. Could that be what you received.

SS quarters of service are satisfied in short careers, but the actual benefit calculation uses the top 35 years of income (by their formulas and adjusted for inflation). Assuming that you do not have 35 years of max SS income (you would have had to start work at age 10) then at least some of those years will be zero in the calculation. With some zeros for yearly income in some years, it would be impossible for your benefit to equal the same as someone with 35 years of max income.