Stanford University’s John Cogan has a good piece in the Wall Street Journal today that provides a very sobering look at the redistributive system that we have in place. First, who is getting what and how much? By Cogan’s calculations the average retiree couple will be getting roughly a $1 million through Social Security and Medicare throughout their retirement.
Starting next year, this typical couple, receiving the average benefit, will begin collecting a combination of cash and health-care entitlement benefits that will total $1 million over their remaining expected lifetime.
According to my calculations based on government data, such married couples will begin receiving monthly Social Security checks that will, on average, total about $550,000 after inflation. They will receive health-care services paid for by Medicare that, on average, will total another $450,000 after inflation. The benefactors will be a generation of younger workers who are trying to support themselves and their families while paying taxes to finance the rest of government spending.
The Tax Policy Center has some interesting tables on the issue here.
Second, who is paying? The redistribution of income sends money much less from the rich to the poor than from the young to the old. These are some important paragraphs:
The existence of so many million-dollar couples is not the result of elected officials carefully weighing the needs of senior citizens against the financial ability of younger workers to meet these needs. Rather, it is the result of decades of separate legislative actions by both political parties to liberalize retirement and health-care benefits, the sum total of which no one has bothered to calculate. [...]
Many of the million-dollar couples believe they rightfully deserve the benefits they have been promised. They have, after all, spent all of their working years paying into Social Security and Medicare. And true enough, the typical 66-year old couple and their employers, on their behalf, have contributed nearly $500,000 in payroll taxes (in today’s dollars) toward these benefits during their working careers.
But regardless of how much they have contributed, the hard reality is that the federal government has already spent it. No matter how deserving they are, it is younger generations of workers who have to come up with the money.
That’s right: There isn’t a bank account with people’s names written on it, nor is there a lock box that contains extra payroll taxes collected since the 1980s. The money is gone and has been spent over the years on things like roads, student loans, wars, and farms subsidies. If Medicare and Social Security are going to pay out benefits promised to people by lawmakers, money will have to be borrowed or taxes will have to be raised to make up the difference between the promise and the taxes collected. We know that Social Security will permanently run a cash-flow deficit starting in 2014. That means taxes collected each year won’t be enough to cover the benefits paid out that year.
Here is additional data put together by Andrew Biggs at the American Enterprise Institute. He looks at the “net tax rate” for Social Security — that is, the statutory 12.4 percent Social Security tax paid by workers minus the benefits they receive from the program. A negative net tax means that the people in the quintile receive on average more benefits than they pay in taxes in the course of their lives. A positive net tax means that less benefits are received than taxes are paid.
The table shows that the two top quintiles paid more in taxes than they receive in benefits. Based on income distribution data from the Tax Policy Center, for 2008 (most recent IRS data) the second quintile begins at cash income of $18,725; the middle quintile at $37,257; the fourth quintile at $65,634; the 80th percentile at $110,346. I suspect that very few people realize that anyone making above $65k pays more in Social Security taxes than they receive in benefits.
Have a good day now.
Looks like the Baby Boomers and the Greatest Generation had their cake and ate it too - they saved for retirement AND spent the money. Now the kiddies have to make up for it.
Reply to this commentLinkReport AbuseGood essay, and very helpful.
Something else to think about: Maybe it's from living too close to DC, but a disturbing number of the retirees I know are simultaneously collecting multiple government pensions as well as Social Security. They live better than I do. Why does the idea of means-testing Social Security payouts not receive more attention?
Reply to this commentLinkReport AbuseWelcome to Delano Roosevelt-ville. It's a 1/2 mile north of Hell.
Leave it to socialists to cause young professional adults to resent their elders.
What good is marinating in our differences and sifting back out the individual ingredients that previously melded together in the melting pot without having age among the fault lines that divide us?
Race; religion; income; ethnicity; age.
As ALgore said, in true Confederate fashion: "E Unum Pluribus!"
(I think he added, "Or something ...)
Reply to this commentLinkReport Abuse"I suspect that very few people realize that anyone making above $65k pays more in Social Security taxes than they receive in benefits."
Isn't that the essence of an "insurance" program? You pay the "premiums" so that if you need the help you get the help, and if you don't you don't?
It's also the essence of a welfare program.
Among the questions are, should the "crossover point" be $65,000, or much lower, in keeping with helping prevent appalling poverty of old people, and, should the SS benefits above $65,000, or much lower, be cut out completely?
Reply to this commentLinkReport Abusethat's $65,000 in annual income
Reply to this commentLinkReport AbuseQuite. This is the real stuff, not discounted present value games. Thanks for posting it.
Now I'd like to see the effects of just 2 changes. First for Social Security, change the COLAs to CPI rather than the present wage index. Second for Medicare, raise the payroll contribution to 4% immediately, and 5% in 3 years, instead of the present 2.9%.
I claim this would make both systems much sounder, actuarially speaking, and roughly balance what people are paying into the two systems with what is being received in benefits.
We cannot afford to pay $2 in benefits for every $1 in payroll contributions and just borrow the difference. There is no funding to pay the resulting debt service; nor room to cover it with current receipts from other sources within the rest of the budget. Income tax revenue is spoken for, to pay for the military and the rest of the actual government.
Middle class entitlements must be fully covered by dedicated payroll contributions meant to pay for them; and if the present level of benefits is not so covered - and it isn't - then the payroll contributions need to rise (Medicare especially) and the benefits need to be gradually trimmed (Social Security COLAs), until they are.
Reply to this commentLinkReport Abuse"Why does the idea of means-testing Social Security payouts not receive more attention?"
Well, now! Come on! These benefits -- albeit created from a different motivation -- now are justified on the basis of how well the "greatest generation" performed in raising their "baby-boom" kids.
Taught 'em how to manage other people's money and other people's decisions, manage the entire economy, and, at the same time, how to love their country deeply and to preserve the Constitution as written.
If the baby boom generation had not turned out so well (further evidenced by how well they have raised the grandkidddies to keep their pants up, not spit on sidewalks, and not to expect to be best friends with their parents and not expect to receive everything they want), maybe the "greatest generation" wouldn't deserve the full benefit.
Somethin' like that.
Socialists can now never claim that I never gave them some of what they wanted:
"How's THAT for a little inter-generational hatred? Do I got it about right?"
Reply to this commentLinkReport Abuse"Middle class entitlements"
And that is the problem in a nutshell.
What does one's "class" have to do with whether someone is "entitled" to something? And why should the mere fact of one's existence "entitle" one to anything, in the first place?
And, well, since when did those around a small deviation from the median income become so supreme over everyone else? Is the median a virtuous position?
"No, maddy! We love it when losers known as "leaders" buy us off! DUH!"
Reply to this commentLinkReport AbuseAnyone who thinks that they are entitled to other people's money, has no class.
Reply to this commentLinkReport AbuseSorry, I am not that clear on either HOW these expected values were arrived at or how the amount of taxes paid was computed. Or how benefits are defined. SO please forgive me for knowing little and asking this.
First, I had thought that the benefit payments for SS were based on time weighted income. For several years(20), I earned relatively little($20-35K) but changed careers and now top out in the SS scale after about 13 years with 13 to go. Were earnings paths such as mine factored into the numbers? Thomas Sowell has frequently pointed out that this type of quintile analysis assumes static memberships which is not at all the situation.
Aren't there disability and death insurance components in SS? Was its value included in the benefits column? This would tend to raise the value of benefits.
Interesting starting point for discussion.
Reply to this commentLinkReport AbuseSo, what do we do about this?
I've been working since I was twelve (41 years ago) and paying SS the entire time (although not much in the days where I made $10/week). I even get annual statements from the SS Admin. telling me what my projected benefits are. Now, I know this is a fiction but most people take these things seriously and plan (or not) accordingly - after all, it comes from the government!
Are oldsters without their own million supposed to just drop dead? Report, Logan's Run style, to monthly extermination events when they've received exactly what they've paid in?
Not only have I now paid well into six figures in FICA (counting employer tax), I've lost the opportunity to invest that money myself.
If I did invest it myself, there's no guarantee that Goldman-Sachs wouldn't have stolen every cent. The gubmint has driven interest rates on savings to zero which has inflated the stock market which, as we know, is "wealth" that can evaporate in a matter of hours.
We are doomed (tm Derb).
Reply to this commentLinkReport AbuseAnd that's why we need death panels.
Reply to this commentLinkReport AbuseIf there WERE a lockbox...what would it look like? Is there a lockbox at my bank? When I deposit money there is there a vault with my bills in it? Of course not.
So the fact that the money has been borrowed...well of COURSE it has. The alternative would be to have a wharehouse full of pallets of 20 dollar bills.
SS was set up as a pension fund, so the actuarially adjusted money should be returned to people who paid in...which is everyone.
What the author is trying to do is steal yet more money for the super rich. If the gov't doesn't have to pay back the 3T that it owes SS and medicare, then oops, I guess those programs just lose the money! And that means that the 40% tax I paid (fed + SS + company share) compares directly to the 32% or whatever that hedge fund managers pay (as their SS cuts off at 100K or thereabouts)...yeah, that's fair. That's what repubs. are all about, screw the middle class and lick the boots of the super rich.
So the gov't doesn't owe 14T, it owest 11T and it's going to stiff people like me.
As for SS needs to be "means tested"...that's nonsense. I paid in my money I should get that money back just as was promised. Why does warren buffett get paid back from the treasury but my pension funds don't get paid back...how is that fair?
And SS is NOT a WELFARE program. Welfare is based on "do you need it" not "how much did you put in". SS is an earned entitlement. It should be actuarially adjusted for lifespans and inflation but that's it.
I have less strong feelings about medicare, as people now on it never put in a dime most likely.
Reply to this commentLinkReport AbuseUm, bbbbbbbbbbbbbbbb (let's all flick our bottom lips with our pointer fingers along with he/she):
Your money gets loaned out by the bank because that's how the bank produces income for itself in exchange for letting you keep your money with them. It's not a free service. You are NOT ENTITLED to a bailee for your money.
The government has no purpose to PROFIT from your SS contributions, because it's a non-for-profit charter. And, when it spends the money from the SS trust fund, of course, it's doing the exact opposite of what a bank does, because that spending results in the opposite of profit ...
ESPECIALLY WHEN IT SPENDS OUT $1,600,000,000 more than it takes in. You could NOT have formulated a more inapt analogy if you tried on purpose.
"SS was set up as a pension fund".
Says WHO? It was set up to be temporary. That, we know straight from the donkey's mouth (not that he was honest, but that's what he said, anyway).
Pension funds are not designed to be temporary, but to last for the duration of the company's operations, or until the pension is voted out of existence by stockholders and/or employees (depending on their employment base/equity status).
No, see, requiring that SS funds cannot be used to pay other spending obligations from the general budget helps to insure two things:
1) SSA can better afford to pay future obligations;
2) There is some further downward limitation on the government's ability to gimmick its way to account for an ever-expanding roster of spending obligations.
That's not real difficult. But, when one falls prey to the toxic smog of socialism, hatred of the rich knows no bounds.
In keeping with Ms. deRugy's post, one of two things is true about bbbbbbbbbbbbbbbb (flick lips, again!):
1) Baby-boomer! Studied anything BUT business or economics or finance in college; purposely stayed away from those things. "Too dry!" Well, now YOU are ALL WET;
2) Septuagenarian or older.
That's the more likely scenario. Someone who is p'd off that he/she could not take advantage of the time value of money (i.e., earn MEANINGFUL interest) on all the money paid in over time to SSA.
So, he/she got forked by Frankie Delano, and therefore, all future generations must suffer the same hair-brained fate.
"If I was a doop, you're gonna be forced to suffer, too, ya little whipper-snappers!"
Reply to this commentLinkReport AbuseI'm neither an old person nor a baby boomer. But I know how SS works. You obviously don't.
The fact that there is no "lockbox" is meaningless. By definition, there can't be one. That's my point. Lost on you though.
SS specifically raised taxes in the 1980s not to pay for CURRENT retirees but to prefund FUTURE retirees, ie the ones who were paying the taxes. They deliberately made it cash flow positive. That rate is still in effect. To turn around and say, "yeah, we raised your taxes to prefund your benefit (like a pension) but we spent the money (of course, how could they not) so we're not going to pay you", is dishonest and stupid.
I hope the republicans are stupid enough to try that. Cut people's social security that they paid for. It wasn't really the earned entitlement it said it was...it was just another tax. I hope they are.
I like your "banks turn a profit" and government has a "not for profit charter"...that is irrelevent. You think you're making a point, but you're just being idiotic. The point is government loans out excess money, as all financial institutions do. It doesn't keep it in a "lockbox". The stated debt of the government is 14T which INCLUDES 3T to SS and Medicare...I can't wait until the republicans default on this. They'll never win another election.
Reply to this commentLinkReport Abuse"No, see, requiring that SS funds cannot be used to pay other spending obligations from the general budget helps to insure two things:
1) SSA can better afford to pay future obligations;"
Your comments show that you are confused. SS excess funds HAVE gone to pay for other programs. SS has received bonds in return...IOUs...just like warren buffett or the chinese. SS earned interest on those bonds...just like warren buffett or the chinese.
If the gov't did NOT use those excess funds, what in the world would it do with them? It would have to pay money to store stacks of 20 dollar bills. And it wouldn't earn interest on them. Think just a little before you pontificate. You don't know what you're talking about.
Reply to this commentLinkReport AbuseFor all of you young people who are concerned about paying for my retirement and/or health care, relax - I don't want your money. I am 68 and receive social security and am consigned (to my sorrow) to Medicare. My income is in the top 20%, and as the article says - I have paid more into both systems than I will ever get back unless I live to be 100 - not very likely. I will be happy to forego any increases of any type is SS, in fact take the whole thing IF the government would use the money to defray the deficits and not spend it on one more idiotic liberal scheme. I will also be happy to buy my own health insurance IF it were available. I can assure all of you that Medicare is a pitiful alternative compared to the average insurance coverage that I had as an employee of major corporations - and costs more. My wife and I pay $700 per month for Medicare coverage that entitles us to long waits in crowded rooms to see our Doctor who receives less reimbursement by far than he received from our "evil" insurance company, so he spends time trying to figure out how to break even. The result is more frequent visits of 10 minute duration so that he can make ends meet in his practice. I will be happy to pay more and forego government "largess" if we can make changes to allow a decent alternative.
Reply to this commentLinkReport AbuseKenny,
Reply to this commentLinkReport AbuseYeah, the loaned out the money and earned interest. The problem is they loaned it to themselves. This would not be an enormous problem IF the Feds were not running trillion dollar deficits. However, they are. The IOS are very much fictional. Social Security benefits will be lowered and payroll taxes increased because there is no way for the Feds to pay off those IOUs.
Tom,
Yes, the money was loaned out. Whether the IOUs are fictional or not depends on what happens now.
If the gov't raises the payroll tax (which cuts off at 105K or so) with the idea that it's just a general tax, then how is that different from raising tax rates on everyone except the very rich? IE it's a regular tax that stops once you reach a certain income (105k or so)...you REALLY think the gov't would not only raise taxes but raise it only up to 105k, ie avoid raising it on the rich? I would think that would be very, very unpopular.
In the end, whether the IOUs are paid back depends on what is politically palatable. I don't think stiffing middle class people (even upper middle class people) so as to avoid raising taxes on hedge fund managers is going to be a political winner.
My point is that the idea that "there's no lockbox, we've been snookered!", is nonsense. There can't be a lockbox. Lockboxes don't exist for financial institutions.
Reply to this commentLinkReport AbuseKennybbb,
I was an actuary. You clearly do not understand actuarial science when you claim SS was set up as a pension fund. It never was such a thing and never has been. FDR purposely structured it as a generational transfer scheme so that the paying-generation would always lobby for its continued existence as it aged, "I paid into the system so I deserve to receive my benefits". Sound familiar?
SS was designed in the mid-1930s at a time of much different life expectancies and working-age to retirement-age demographics. This country should have transitioned to a more robust system a while ago. But it seems the consensus is to maintain some sort of generational transfer scheme, as sub-optimal as that is. So be it. Changes need to be made to make it more sound even under a generational transfer scheme.
But don't call it a pension fund.
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