Class Warfare Blog

February 3, 2013

What is the Value of Your Safety Net Contributions?

A pundit on Bill Maher’s show (Real Time) last Friday claimed that the problem with the U.S. economy is basically due to “entitlements” meaning Social Security, Medicare, etc. (Can you hear the echoes of “We have a spending problem. . . .” Thank you , John Boener, thank you Mitch McConnell.) She stated that people pay in $150,000 over their working lifetimes but take out $300,000.

I found this claim interesting in that it was posited as a feature of an unsustainable system, a system like your wallet; you can’t take out more than you put in without big trouble.

Let’s look at this. Consider that an average (meaning median) income in the U.S. is a bit over $50,000. We’ll use $50,000 for simplicity (and we will make all calculations based on current values which will in essence account for inflation, etc.).

Current payroll taxes are 6.21% on the first $114,000 of income, so this covers our average blokes $50,000 worth of income. If our average bloke works for 40 years, his total income comes out to be $2,000,000 and his contributions to SS and Medicare would be $125,000, close to the $150,000 figure quoted. Given that the average income is over $50,000, that probably makes up the difference. I am going to go with the $150,000 figure as I am trying to see if her figures are legitimate.

Realize that those contributions were made over a 40 year period and that Congress requires that excess contributions be invested in Treasury bills that pay interest. So, the question is, what would be the future value of such contributions at the end of a 40 year period. Zip, I am off to the Internet and a Future Value Calculator.

If roughly $300 per month ($150,000/480 months) were invested at 3% interest at the end of 40 years one would have accumulated $278,000!

If roughly $300 per month ($150,000/480 months) were invested, at 6% interest at the end of 40 years one would have accumulated $600,000!

Currently Treasury bills aren’t at 6% or even 3% but it wasn’t that long ago that they were. Over a 40 year time span, those are not unreasonable averages.

Now, Congress has chosen to use my contributions to pay other people’s benefits rather than invest it, but that doesn’t mean that I didn’t effectively contribute as much as I will take out.

A more sensible discussion of these systems would be to look at what they can provide, the various options to provide it, and then make our choices. Unfortunately, politics is the only basis upon which decisions are currently made.

For years and years, people have been crying “the Boomers are coming, the Boomers are coming!” and they (we) were going to lay waste to the economy, shred the social safety net, etc. I am part of the leading edge of the Baby Boom generation, the “Boomers” in question. I retired in 2006. The “Baby Boom” lasted from 1946 to 1964, 18 years. In other words, in 2024 (2006 + 18 years) the Boomers will have all passed into the system and the numbers of people entering will fall way off.

According to the SSA’s 2010 Annual Report, the Obamacare healthcare law has extended the exhaustion date of the Medicare trust fund from 2017 to 2029. The SS System would not be similarly depleted until 2037. This means that if nothing is done and the system and economy stay as they are projected, the SS System will have to cut benefits to roughly 75% of current amounts at that point.

In other words, there is no real problem with Social Security. Raising the amount that is taxed to higher income levels would solve all problems for the foreseeable future.

The real problem with Medicare is not in providing the services but that the costs of services keeps escalating. Interestingly enough, Medicare critics, aka Republicans, claim that Medicare isn’t holding down cost enough. Tell that to doctors who take Medicare patients. Most accept what Medicare pays as payment in full and Medicare pays a fraction of what those services are billed at (according to my small sample, between 50% and 75% of billed amounts). Medicare is the only public health service which is actually holding down costs. Private insurance companies have no interest in doing so as it would reduce their profits (which are based on the costs of services).

So, pundits sling figures around, self-serving figures which are often quite misleading. When listening to these folks, you have to ask whether they are trying to inform you with their comments or convince you. Someone trying to convince you is an activist who has a point of view they are trying to sell. Someone who is just trying to inform you is a safer source of reliable information.

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5 Comments »

  1. Timely. I just finished watching the Real Time Sunday repeat.

    Comment by john zande — February 3, 2013 @ 3:14 pm | Reply

  2. I have to add some corrections to your calculations:
    1) the employer also pays 6.2% into Social Security in addition to 6.2% that the employee pays (and also 1.45% to Medicare). This additional 6.2% is basically a part of employee’s salary because the employer factors that in as a cost of hiring an employee and reduces the gross salary of employee accordingly. Just because that employee never sees that money, it does not mean it’s not a part of compensation. That will bring the amount of contributions to at least $200-$250K
    2) assuming employee works these 40 years (or 35 required for full Social Security), the average person will not receive the Social Security for 40 more years. Normally, it would be about 15-20 years on average, though some will not live to retirement and others will live to 100 years old.
    3) Statistically, there’s a higher life expectancy for people who were receiving higher salaries than for lower-wags workers. So even while someone who earned less before retirement may get comparatively more from the system in a given month than their contributions would provide, they will receive the benefits for shorter period of time.

    Comment by List of X — February 4, 2013 @ 12:59 am | Reply

    • I was trying to approach the calculations from as simple a viewpoint as possible (but maybe I was too simple). I wanted the calculations to be based on what people could actually see on their pay stubs as “their contribution”, with them thinking of of their employers contribution as not being theirs. The main point the “pundit” was making was that we only “put in” $150K but “take out” $300K making us all “takers” which I thought wrong. Your second point confuses somewhat . . . 40 more years (?).

      Thanks for reading closely and taking the trouble to chip in! Someday I will work up the courage to try a List of 10!

      Comment by stephenpruis — February 4, 2013 @ 7:22 am | Reply

      • My main correction was number #1. Just because we don’t see the employee contributions on our paystubs, doesn’t mean we don’t earn them. This effectively makes our contributions twice what we see (unless we pay self-employment tax, which is essentially both employer and employee contributions paid by the same person.). So an average person does put in less than he/she takes out, but it’s not $150K put in vs $300K taken out, but more like $250 contributed vs $300K taken out.
        About 40 years, I only wanted to note that we normally receive the Social Security payments for a much shorter period than the one during which we contribute.
        You could even guest-post your list of 10 on my blog, if you are interested. Personally, I find it much harder to write a coherent one-piece post than a list of 10 items 🙂

        Comment by List of X — February 4, 2013 @ 11:32 pm | Reply

        • I did understand your point about the employer’s contribution and agree with it. Interestingly enough, I have a public (teachers) pension which took 8% of my income (with another 8% from my employer) and when I retired after 35 years, my net take home pay didn’t drop at all (partly due to drops in my expenses: union dues, commuting, etc.) which clearly indicates that SS is not being overly generous.

          Re the List of 10: I guess our minds work differently! I woke up this morning realizing I was writing a blog post in my sleep (posted just a few minutes ago). But then I have been writing single issue pieces for decades, so practice, practice, practice . . . still the only way to get to Carnegie Hall!

          Cheers,

          Steve

          Comment by stephenpruis — February 5, 2013 @ 7:38 am | Reply


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