Social Security: The Mother of All Ponzi Schemes

Blogger's note: The following comes from Ryan Alternative Staffing president Tim Ryan. -- cr

I am not a genius. I like to think that I have a healthy dose of common sense and the ability to decide what is a good deal and what is a rip-off.

We’re currently hearing a lot of talk about socialism… the “S” word. The Social Security System has been much talked about too. Will it be there when I retire? Should we have privatization? Do we need to eliminate the taxable earnings cap?

All of this got me thinking about whether or not Social Security (old age survivor’s disability income-OASDI) is a good deal. After all, it is American branded socialism at its best and most have come to rely on its benefits to plan their “Golden Years” strategy.

Former President Bush took a beating for suggesting partial privatization while Democrats credit Social Security's inception as the party's crowning achievement of the 20^th century.

All of this begs the question to be answered; would I be better off going it alone?

My approach was not complicated. The first thing I did was find the OASDI tax rates since the start in 1937. (It was 1.0%) the table is shown below:

Calendar Year ___________OASDI Tax Rate

1937-49_________________1.000

1950 ___________________1.500

1951-53_________________ 1.500

1954-56_________________ 2.000

1957-58 _________________2.250

1959 ___________________ 2.500

1960-61_________________ 3.000

1962 ___________________3.125

1963-65 _________________3.625

1966 ___________________ 3.850

1967 ___________________ 3.900

1968 ___________________3.800

1969-70 _________________4.200

1971-72_________________ 4.600

1973 ___________________4.850

1974-77 _________________4.950

1978 ___________________5.050

1979-80_________________ 5.080

1981 ___________________5.350

1982-83_________________ 5.400

1984-87 _________________5.700

1988-89 _________________ 6.060

1990-2008 ________________6.200

Next I used my most recent Social Security statement that handily lists all of my taxable yearly earnings.

Matching the appropriate tax rate with the yearly earnings and multiplying the two produced the yearly amount contributed to my “account”. Because my employers match my contribution dollar for dollar I doubled this number.

The next issue to consider was the investment value to be factored in to my account balances. I decided to take a very conservative approach to this question. It is the most controversial issue when discussing privatization.

You’ve heard all the arguments against privatization. People aren’t smart enough to invest on their own. The Wall Street bandits will rob us blind. What happens if the market crashes and wipes your account out right before you’re about to retire?

All the arguments have some validity, but for my experiment I decided to make them a non factor. I invested my balance yearly in a savings account that paid 5% interest (compounded yearly because I’m not smart enough to figure out any other way).

I followed this formula up through 2008. It’s interesting to note that I made $1,150 in 1970 as a 15 year old kid . . . a point not wasted on my own two children!

Because we’re living longer my full retirement age is 66 years and two months. This will keep me working through 2021 (if you do the math you can tell I’m 53 now). For estimates of my future contributions for the years 2009 through 2021 I used the figure provided on my statement that estimated my taxable earnings per year in the future. I used the current tax rate of 6.2% in to the future and finished out my account balance at full retirement age.

This entire exercise took me about one hour. Had I been given the choice to self administer all my employee/employer OASDI contributions via a bank savings account paying 5% annual interest, I would have $981,875 to retire on in 2021. My most recent estimate of Social Security benefits at full retirement is $27,336 per year.

If I just took the pile of money and put it under the mattress and took out $27,336/year it would last almost 36 years or until I turned 102. If the $981,875 continued to be invested at 5% my yearly payout on interest alone would be $49,093/year without touching the pile. If my pile was invested at 5% I could withdraw $72,000/year until the pile was gone at age 85. You don’t have to be a rocket scientist to figure out this no brainer.

Using the same methodology, my spouse would yield a pile of cash totaling $803,361 at her full retirement year in 2022. Invested at 5% the yearly interest payout alone would be $40,168. Her estimated annual Social Security payout is $33,144 which would last about 24 years if placed in that same mattress. If removed from the mattress and invested at 5% she could withdraw $65,580/year until the pile was gone at age 85.

If you combine the two piles we could take out our estimated Social Security amounts of $60,480 for about 30 years. We could live off the 5% interest and make $89,262/ year and have a pile of untouched principal in the amount of $1.79 million after we both check out from planet earth. Or we could live large on $137,580/yr until we reach age 85.

Now I’m quite sure that there are those out there capable of finding flaws in this analysis. Ok, I realize it makes some assumptions that may or may not be valid. This aside, it is an eye opener and one cannot argue with the concept of compounding.

As for the other arguments against privatization I would ask you to consider the following:

1. Through March 2009 the Federal Government has borrowed $2.4 trillion from the trust fund to pay for all sorts of pet projects. social programs and foreign adventures into Vietnam and Iraq. We are spending money like drunken sailors on leave. Might we not be better off if Washington didn’t have the ability to get their hands on our retirement fund?

2. If the Social Security System is such a great social program why don’t government employees, school teachers, politicians etc, participate in there own program? Did you know members of Congress actually have three retirement programs to draw from with ridiculous vesting rights?

3. Do you realize that the government requires you to pay income tax on your OASDI payroll tax? Talk about double dipping!

4. Social Security which was originally intended to be a supplemental retirement program has become to many their sole source of income to live off during retirement. It has created a culture of non savers. Look at the decline in this countries rate of savings over the years. We have become a culture of spenders that live beyond our means, that count on the government to come to our rescue and we have a live for the moment mentality.

5. Those that point to the recent stock market collapse as the “perfect storm” against privatization are ignoring the reality of basic retirement planning. By following the advice of virtually any reputable investment counselor those within five years of retirement would not have been in the stock market at all but rather invested in conservative income producing investments.

So, is Social Security a Scam? Maybe, maybe not? One thing is clear, it was a great deal for those early participants who received benefits that far exceeded their contributions. It would seem this tide changed in the late 60’s and early 70’s. At the very least all those that view the system as the end all to do all should analyze their own account and come to your conclusion. I know where I’d put my money.