Thursday, January 23, 2014

What Has Really Happened To All Of Your Money You Have Paid Into Social Security and Medicare

Einstein's Brain
Albert Einstein had a vivid imagination.

He also had a massive amount of brainpower such that his heirs approved the removal of Einstein's brain after his death so researchers could figure out why he was so brilliant and creative whereas other mere mortals pale by comparison.

His most famous discovery, of course, was his theory of relativity with the equation E = mc2.  He was intrigued with quantum mechanics and theories of light and space, all of which are far beyond us here, except for a few rocket scientists and gearheads who read this blog on a regular basis.

One of his thought experiments might help us unlock the mysteries of the American Entitlement System, as odd as that may sound.  To the vast majority of people in America, the cash flows associated with such important programs as Social Security and Medicare are as foreign and confusing to comprehend as quantum mechanics and the theory of relativity anyway so why not use the theory of relativity to explain Social Security and Medicare?

It shouldn't be so confusing. Understanding the mechanics of where your payroll tax dollar goes each and every time it is taken out of your paycheck or when you pay your estimated taxes is important because without a clear understanding of that process, we may never get to a point where the political will in America will be enough to reform both Social Security and Medicare and, to our way of thinking, significantly improve both programs for future generations.

Einstein used to day-dream and try to imagine what it would have been like to ride on a beam of light. He once imagined how riding on a beam of light from a distant star beyond the sun would be affected by the gravitational pull of the sun, a theory which was not proven until an eclipse occurred 11 years after he published his theory.

Let's try to use that analogy to do the same with your payroll tax dollar paid every week, every other week, every month or every quarter:

Let's say you will be riding on part of the $100 taken out of your paycheck for your FICA (Federal Insurance Compensation Act) taxes for a certain pay period. That $100 will represent 7.65% of your gross compensation for the pay period which means you would be making about $1307 for that particular pay period.

(Self-employed will pay double the 7.65% FICA tax but let's keep it as simple as possible with this as an employed worker for now)

$78.43 of that $100 in FICA taxes will go into the Social Security Trust (sic) Fund in your name with your SS# on it. $21.57 of that $100 in FICA taxes will go into the Part A Medicare Trust (sic) Fund as well as your contribution to the system.

(Since the cash flows associated with Medicare Part A and subsequent additional accounts B and D are different than with Social Security, we will try to come back to them in this sort of thought exercise at a later time. Mainly because they are so complicated as to make even Einstein's brain get scrambled like so many eggs)

Are you with us so far?

Imagine that you are riding on the $78.43 that goes into the Social Security Trust (sic) Fund. Does that mean you will be flying along with those greenbacks into a dedicated bank account or IRA account like many of you have with registered 'real' trust funds or money managers?

If it was true, you would see that $78.43 invested in such things as mutual funds, stocks, T-bills, bonds and other financial instruments, even as safe as a savings account where those funds could sit for the next 45 years of your life starting at age 22 and accumulate interest, dividends and capital gains growth just for you and you alone.

If you stayed on that $78.43 for those 45 years, and watched all of the other $78.43 payments come in every single month for those ensuing 45 years, you would most likely see an appreciation of those assets become a pretty nice nest egg of $216,153 or so upon retirement.

$78.43 per month paid into your own private retirement account from the amount of money taken out of your own salary paycheck for 45 years would produce close to $216,153 for you upon retirement which you could use for your retirement and/or pass along to your heirs in the event of your unfortunate demise.

That amount of money would be available to any worker in America today who makes about $15,684/year, not even above the poverty level for a family of four.

Sounds pretty good, right?  You would be all snug and safe in that investment account sitting on top of a growing stash of funds for your retirement building up tax-free and all that for 45 years and life would look pretty good, wouldn't it?

Except that is not the case today. Not by a long shot.

The $78.43 you would be riding on today goes right out of your paycheck to the US Treasury in Washington where it is credited to the incoming revenue account of the US Government each and every month.

Let's see where it really goes.

You ride that $78.43 to the general bank account of the US Government where it is duly accounted for and noted on the monthly budget sheets kept by the IRS and tracked by other government agencies. A credit goes on the books in your name only at the Social Security Administration (SSA) which sends out annual notices to you saying you have received credit for that $78.43 for that pay period or, let's say, $941.16 per year.

However, since you are riding on that specific amount of money you paid to FICA, you will follow that $78.43 through the IRS bank account and be re-routed with lightning speed to the SSA where you will be spit out as soon as the SS checks are sent out at the end of the month to any one of the 44 million+ senior citizens now on Social Security.

In essence, you will be thrown overboard from this $78.43 as soon as it leaves the SSA and heads to some senior citizen to spend as he/she likes or needs to in their golden years.

That $78.43 could be sent anywhere in the country, or overseas if your money is mailed to some ultra-wealthy billionaire who has a home in the south of France or Barbados or somewhere exotic like that.

Yes, the older billionaires get a Social Security check just like the poor seniors do, as hard as that is to believe. In virtually all of their cases, it is a much higher monthly amount than it is for the poor senior simply because the rich seniors paid in the maximum amount each year to SS via the FICA tax and the poor senior did not pay in the maximum amount.

The maximum amount of Social Security anyone can receive today is $2642/month. The average monthly Social Security check received by seniors is just under $1300/month.

Compare those amounts with the $216,153 nest egg you could have been sitting on had we adopted a modified public national retirement plan even as recently as 34 years ago in President Reagan's first term in the White House when many of us first started working on transitioning to such a more advantageous system for everyone under the sun.

We are of the opinion, and have been for quite some time now, that you, the average American citizen and perhaps not-so-average citizen, are being seriously short-changed by the very government program that many people say is 'working so well to eradicate poverty among seniors in America', Social Security.

What could be more helpful to 'eradicate poverty' among any of our seniors and families in America than to have a program that builds real wealth that can be transferred from generation to generation where possible?

Do you realize that if you die at age 65, 11 months and 31 days, 59 minutes and 59 seconds before you turn age 66 which is the eligibility age for Social Security today, that you will get nothing from all those FICA payroll taxes you paid into the SS Retirement System? Regardless of whether you are white, African-American, Latino or just made a citizen after landing here from the planet Mars 7 years ago.

You don't make it over the goal-line at age 66 and poof! All those FICA contributions you made go to someone else. Obviously since: 1) you will not be here to receive the monthly checks going forward and 2) your heirs will not inherit the $216,153 that could have been in your individualized retirement account had we gone to another system 45 years ago.

You could have also retired at age 60 or 55 or whenever you want to under this new program whereas you are trapped into working yourself to death until you are age 66 to be eligible for dollar 1 under the current antiquated Social Security system.

Einstein's theory of relativity and quantum mechanics may be over your head and very difficult to understand.

Understanding the difference between having $216,153 in an individual retirement account versus receiving $1300/month in a Social Security check is very easy to understand. Assuming you have no other assets and your new account doesn't grow by one penny over the course of your retirement, you could pay yourself the equivalent of over 13 years of similar payments to what you can expect from Social Security under the old way of doing things.

And guess what? Your children could be doing the same for their retirement and not be burdened by the ever-escalating higher taxes they will have to pay to support you in your dotage under the current plan.

It would be an amazing sea-change development in the evolution of our national retirement savings plans. Social Security was passed in 1935 and has remained virtually unchanged in structure since then.

Don't you think it is about time to come into the 21st century with a new way of providing much better retirement benefits for everyone in America?

We do. The sooner, the better.

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