ANALYSIS OF SOCIAL SECURITY PAYMENTS AND THEIR PRESENT WORTH
William E. Haynes
 

       One frequently hears of late that those receiving Social Security
(SSI) payments will withdraw many times what they paid in over the
years.  I have doubted that,  and to satisfy myself performed a present
value analysis on my personal lifetime payments.

       The results are shown on an accompanying Excel spreadsheet (not
included here) .  They are truly astounding! The amount of money that
I, personally paid in to SSI over the years totals $56,720.00 in "then
year" dollars.  By those numbers, I will indeed have received back
every cent that I paid in by about the middle of the fourth year of
receiving "benefits".
       However, no competent accountant would so value the moneys that I paid
in over the years.  The true value today must be expressed in
consistent 1995 (now 2005) dollars. When that is done, a quite
different picture emerges. In fact, the picture is astounding,
exceeding anything that I had expected when I began this exercise.

       Please follow me through the method and reasoning that I have used.

       First I obtained a table listing the "then year" value of an 1860
dollar (see column B).
       This shows that an 1860 dollar would have the purchasing power of
18.37 1995 dollars. The other corresponding values in the intervening
years are shown in column B, beginning with 1935,  the first year of
SSI taxation.
       Column C shows the number of each year's dollars that equal the value
of a1935 dollar, yearly up to 1995.  For example, it would take 2.07
1943 dollars to equal the value (purchasing power) of one 1860 dollar,
and 1.26 1943 dollars to equal the value of one 1935 dollar.
       Then I calculated the value of each year's dollar in 1995 dollars
(shown in column D).  That value equals the 1995 value of the 1860
dollar divided by the"then year" value; for example, the first figure
in column D (11.20) equal to 18.37 ( 1860 dollar value in 1995 dollars
) divided by 1.64 (1860 dollar value in 1935 dollars).  That
calculation is repeated for each year from 1935 through 1995 and
entered in the corresponding year in column D.
       Column E is the growth ratio of the value of the 1995 dollars shown in
column D, if that number of 1995 dollars had been invested at 3%
compounded for the respective intervening years.  Thus, to calculate
the value in 1995 dollars of each dollar paid to SSI in the indicated
year if it had been invested and returned 3% per year,  multiply the
amount shown in each line of column D by the ratio shown on the same
line in column E.
       The result is shown on the corresponding line of column F.
       To clarify once again; the 1935 dollar shown on line 4, column C is
worth 11.20 1995 dollars in purchasing power.  If that same 1935 dollar
had been invested at 3% since 1935, its present value would be another
5.89 times its 1935 value,  or $65.98 in 1995 dollars.
       The information in column F will allow any one who knows what they
paid in to SSI in a given year to determine its present value under the
conditions stated. Adding up the yearly values will allow one to arrive
at the present value of their total payments over the years.
       It must be pointed out that the table as shown will only function for
someone such as the writer who has paid in ever since 1935. To
calculate your present value you must start out with the first year
that you paid in and set that year's dollar at its value in 1995
dollars and proceed as the writer has, above.
       The values in column G are my personal data based upon information
obtained from the Social Security Administration.  It is available to
anyone by requesting a "Personal Earnings Benefits Estimate Statement".
 You will receive a Form SSA 7004. Fill it out and return it to the
agency and you will receive a record of your SSI covered earnings over
the period of your working life on an SSA Form 7014 (not a record of
SSI taxes paid in).
       The data is not reported year by year, but in sets of years.
Consequently, I have divided the total for a set of years by the number
of years in the set to arrive at an average for each year in the set.
I also calculated the SSI tax withheld as 8.3% of the taxable income.
That is subject to correction when I receive more data, already
requested from the SSA.  Nevertheless, the point of this paper is made
by applying the 1935 dollar value raised to compensate for inflation
and to reflect its present value if it had been invested with an
average return of 3% over the respective years since paid.
       You will note the value on each line in column I; it is the value per
dollar shown in column F multiplied by the number of dollars paid in to
SS in column H.  The result is the present value under those conditions
of all the money paid in that year. The total of column I is the total
present value of all of the money that I have paid in to SSI over the
sixty years since 1935.  It comes to the truly astounding sum of:

       $ 361,067.46

       The real shock was when I realized that this represents only half of
the money that was paid in, because, of course, my employers paid in an
equal amount at the same time.  Consequently, the real total comes to:

$ 722,134.92

       Assuming that I will live to be 90 years old (19 more years), I would
have to draw a yearly amount equal to :

$38,007.10

to zero it out in my lifetime.  This is roughly three times what I am
actually drawing from SSA. If, instead, I invested the principal at 6%
in tax free municipals, I could draw:

$ 43,328.10

per annum  and still leave the principle to my heirs, intact.  That
makes the claim that we will exceed the amount paid in in only four and
a half years look really silly.
       But, much more serious is the question of what has happened to all of
that money that should be there in the SSA coffers ?
       The answer is that our Congress has seen to it that it is never going
to be there; that it never was there.  To produce the result that I
have calculated,  the SSI funds would indeed have had to be invested;
that is,  the Social Security Trust Fund (that name is a macabre joke,
is it not?) would have had to be fully funded.
       The really sick truth is that if the Congress had treated SSI funds as
a true "trust fund" and invested it (as state retirement funds such as
the California CALPERS Fund, etc. are) the entire fund would long since
have been self-supporting and no one would even have to pay into it any
more !  What is more,  the amount of the retirement payments would be
far more generous.  They would probably be adequate to fully support
the recipients,  not just act as a minimum supplemental income.
       Such a situation would bring with it a number of really lovely results.
       For example,  all of those SSI taxes would have been flowing into blue
chip investments,  greatly increasing the liquidity of the US economy
over the years.
         Once SSI became fully funded, employers would no longer have
to withhold SSI taxes from their employees' paychecks, nor add an equal
amount from their own funds.The result would be a significant reduction
in labor costs to US manufacturers with corresponding improvements in
their competitive advantage vis a vis foreign competitors,  and
simultaneous pay increases for every employee at no cost to anyone, not
even the government !
       There is more.
       The tremendous overhead of civil servants now collecting,recording and
managing SSI funds would no longer be needed.  Pay out would be
relatively simple and could be highly automated if everyone who had
worked more than a base number of years were eligible for the same SS
pension.
       Also,  the swelling resentment building up in the Generation-X'ers
against us oldsters would be alleviated as they perceived that they
would also get "their fair share".
       Still another point:Some private retirement plans ("qualified" plans)
are insured by the government, governed by the Employee Retirement
Income Security Act.  If the plan or the company goes broke, the
government (that is,  all the rest of us!) steps in and picks up the
tab.    If the plan is "non-qualified", however, you are out of luck.
All the money you paid in belongs to the company and will be at risk if
they go bankrupt.
       If SSI were to become fully funded and achieve a fund level that would
assure payment of more than just supplemental income survival level
pensions,  the risk to beneficiaries of non-qualified pensions would be
far less catastrophic.
       In short, our government really blew it !
       The good news is that it is not too late. SSI can still be revised to
achieve a fully funded status within a finite number of years,  if the
Congress will just set it up that way.  There is a tremendous bow wave
built up out there now,  but it can be overcome,  and within a
reasonable time SSI can be put on a basis described above.  There is
nothing magic about it; as stated,  that is the way most retirement
funds are set up now, by law.  Once again, the government saw fit not
to adhere to its own laws.
         Every working American is poorer because of it.
       There is still another aspect of SSI that needs airing.
       There is a host of inappropriate expenditures of SSI funds
(approximately 31% of funds disbursed, according to a recent
Congressional speech); payments to people who never paid into the fund
and are not surviving spouses of those who did.  They include variously
disabled people,  including alcoholics, drug addicts and (believe it or
not) a growing number of dyslexic and attention-deficit suffering
children.  Clearly, the Congress has viewed SSI as a grab bag from
which to fund any social experiment they thought fit.  The SSI fund can
be converted to fully funded much more rapidly after such parasitic
appendages are removed,  whether by outright cancellation or by
transfer to a more appropriate agency and administering authority.
       Furthermore, the public announcements about SSI troubles never discuss
the fact that a large percentage of those who pay in, and have paid in,
in the past, never live to collect a cent.  In fact, even when SSI was
instituted it was to begin at age 65.  The joker was that at that time
average male life expectancy was only 57 years!
       So the average person was scheduled never to live long enough to
collect.
       (One of the questions that I have not yet investigated is what
percentage of eligibles live to collect now and what their average
duration of collecting and amount collected are. That needs to be
expressed as a percentage of the present value of their lifetime
payments to the system.)
=====================================================
Copyright 2004 - William E. Haynes
Permission to reproduce granted if author is fully credited; please
call 310/541 9166 or e-mail: bill2space@cox.net
(The spreadsheet is not included here)
Ref "How Much Is That In Real Money? A Historical Price Index for Use
as a Deflator of Money Value in the Economy of the United States,"
Proceedings of the American Antiquarian Society, 101, pt. 2 (1992), pp.
297-373.

Note:  I have not checked to determine the actual SSI rates over the
years.  They were considerably less than
8.3 % at some time and have since increased to over 12%.  Although 8.4%
is a fair average rate, my figures need to be corrected accordingly.

Ref "Risks of Deferred-Compensation Plans", Kathy Kristof , Los Angeles
Times, pg. D-2, Jan 14 95.

Ref GAO Studies; e.g., "Social Security: Rapid Rise in Children on SSI
Disability Rolls Follows New Regulations" Reports and Testimony: Sep.
94.

Wm E Haynes
Aerospace Systems Analyst