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William E. Haynes
Bill Haynes (R) in a T-Bird Ultralight kit aircraft he built as a hobby
ANALYSIS OF SOCIAL SECURITY PAYMENTS AND THEIR PRESENT WORTH
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.
This shows that an 1860 dollar would have the purchasing power of 1995 dollars.
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. 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.
I then calculated 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.
I took 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 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.
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:
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:
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:
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, 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: firstname.lastname@example.org (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.
William E. Haynes is an aerospace systems analyst who worked in senior positions at major systems firms in California until his retirement. He is a fighter jet pilot and flew numerous missions in the Vietnam War.