Thursday, August 11, 2011

Social Security may not be a bad deal

Today I started, as all good mathematicians and scientists, with a hypothesis: Social Security is a bad deal for those who have been gainfully employed all their lives. Ultimately there are two cases. First Case is my out of pocket expense and potential return. Second Case is the return on the total paid to Social Security by me and my employer.

As you may know there is no money in the Social Security Trust Fund. A Democratically controlled congress, back in the '70s I think, took all the cash out and spent it, all future surplus was also put in the national treasury and spent. The trust fund now contains a pile of IOUs to be paid from future income taxes. (If you have an income, you get to pay yourself for your Social Security "entitlement")

That said, the following is pure speculation as congress may decide we are not entitled to our entitlements after all... they having the wisdom to spend our money as we might have if given the choice. (yep, you bet)

Case one: Having applied for early Social Security benefits at age 62, My entitlement payment is X dollars a month. As I am embarrassed at the smallness of the number, it will remain a secret. However, I have used standard financial formulas and calculations, you should be able to put your X in and have your numbers.

Step one was to find how much I actually paid to Social Security from age 13, when I was paid to work in my parents store, to the present. 52 years. Social Security reported that total annually until I started taking benefits. I built a spreadsheet, entered each annual payment, and calculated the future value of these to the present.  That is 112.5X for the total of all the years, Which had to be calculated separately because the SS tax rate changed almost every year. I did the same for medicare: 26.3X

Next I wanted to figure out what I would be able to get if I had that 112.5X dollars. First I looked up an insurance association web site. They had a calculation for figuring the lifetime return from an annuity, payments continue to death, no survivor payments: .7136X. From Medicare I would get : .1664X Please notice the placement of the decimals. I would get about 88% of what Social Security now pays, from the annuity. ( but then again SS takes back some of my X so it may be a wash)

Case Two: The total paid to Social Security, my money plus the employers contribution, is fortunately, exactly double. Then, look at these numbers. From an annuity I would get 1.76X out of which I would have to pay about .2X for a $2500 deductable Health Insurance policy similar to what Medicare provides. That is to say I would be forced to live on 1.56X instead of X.

Conclusion: I doubt I could live, in any condition except poverty, on the X. With 1.56X I could live in comfortable poverty. What would surprise me more than anything if the X does NOT trend to zero. Does anyone know what Walmart pays those greeters?

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