Social Security and the Boomers

Disclosure first: I am a baby boomer.

The Co-chairs of the President's Commission have released their deficit reduction proposal and understandably there is something there to hate for everyone. In future blogs, I will discuss tax inequities and why what Republicans call Democratic "tax increases" are really just attempts to eliminate the tax bias against working stiffs. Today though, reflect on these interesting facts about Social Security. Perhaps they will put recommendations to cut future benefits in perspective.

The Social Security program began under Franklin Roosevelt in 1937. Initially, the FICA payroll tax was 2% of wages. Gradually over the years (and most remarkably under Eisenhower, Nixon and Reagan), the payroll tax has increased to 12.4% today. Half of this is paid directly by workers and the other half by their employers. If you are self-employed like my husband, you pay the full amount. One could argue that all workers pay the full amount since employers calculate total cost of employment and adjust wages accordingly, but for now we'll just look at the worker's costs and benefits.

Let's look at an American born in 1920 who worked from age 20 until age 65 and then retired and collected Social Security. We'll call him George, Sr. Assume that George, Sr. paid the maximum FICA rate and earned the maximum benefit. During his 45 years of employment, he paid about $20,000. After retiring in 1985, assuming he lived another 20 years, he received the maximum benefit of $172,000. This worker of my parents' generation received more than 8 times what he paid in. Where did that come from?

George, Jr. was born in 1945 and also started working at 20. He worked from 1965 until 2010 and has just retired and begun collecting Social Security. George, Jr. paid $179,000 in Social Security. Over the next 20 years (Both Sr. and Jr. are due to die at age 85), George, Jr. will collect a total of $526,000. George, Jr. will receive almost 3 times what he paid in. Still a good deal, right?

Wrong. If both men had invested their contributions and earned 5% per year in returns, Senior could only have had $60,000 when he retired. He did very well indeed with his $172K return on a $20k investment. Junior however would have had $640k at 5% on his investment. Junior actually lost $115k in the deal.

So what is the most fascinating observation here? Junior's net donation to Social Security of $115,000 is almost exactly what Senior was paid over and above his possible earnings on his investment.

So what is the problem with Social Security? It's not the Boomers. We paid our share. And it's not our children's generation either. With the increases in retirement ages and their even higher contributions, they stand to fare even worse. The problem is what politicians did in the past, buying senior citizens' votes with their children's money.

How to fix it? First, remove the cap on contributions. Right now, you pay 6.2% on your first $106,000 of income. Few of us make more than that. Those who do pay a lower rate. If you earn twice that ($212,000), your FICA tax is 3.1% of all income. If you earn ten times that ($1,060,000), you pay .62%, less than 1% FICA tax. Let's make it fair for everyone. We're not building our own Social Security accounts. We're paying for the previous generation. Everyone should contribute equally.

Interested in a broad range of options for cutting the federal deficit? The New York Times has a do-it-yourself budget balancing tool here.

Want to do the math yourself? Here are the links you need:
http://www.taxpolicycenter.org/taxfacts/Content/PDF/ssrate_historical.pdf
http://www.ssa.gov/history/pdf/t2a4.pdf
http://www.ssa.gov/history/pdf/maxandminbenefits.pdf
http://www.moneychimp.com/calculator/compound_interest_calculator.htm


Calculation details:
  • maximum tax and maximum benefit used in both examples
  • COLA not included in either
  • interest rate calculator assumed a constant contribution level over 45 years
  • both start working at age 20, retire at 65 and die at 85
  • no consideration for the additional private pension income George, Sr. might have earned in his union job or what George, Jr. missed out on with the near disappearance of guaranteed pensions and private sector union jobs
Later: Why the working stiffs pay the highest tax rates and what we can do to make them fairer.
See also Boomers Redux

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