Wednesday, December 19, 2018

The Social Security Lump of Coal for Millennials


(first published in North State Journal 12/19/18)

Everyone knows Social Security is the ‘third rail’ of American politics. Touch it or even talk about it as a politician, and ‘you will die’ as they say.

Does everyone also know that while Social Security worked to help alleviate suffering during the Great Depression, massive demographic changes since then have made it one of the worst financial investments Millennials will make without any freedom to invest their money otherwise?

‘Currently, for every $1 a middle-earning couple (born in 1985) pays into Social Security, they can expect $1.01 back in benefits when they retire. That’s not a great return on investment, and it may fall in the future because Social Security isn’t on track to keep paying this level of benefits. If the government cuts benefits enough to make the program solvent they’d only get $0.80 for every $1 they pay in’*

Welcome to your Social Security Lump of Coal this Christmas, Millennials!

Social Security provides 50% of retirement income for close to 50% of the 62 million seniors (31 million) on Social Security.  20% of all seniors (12 million) rely almost totally on Social Security benefits with no other retirement income streams.

The biggest problem with Social Security in the minds of freedom-loving, market-based conservatives is not that it is too expensive or too big of a government program. The problem is that it does not provide a much higher retirement benefit to the very people it was designed to help in the first place: lower and moderate-income senior citizens.

The sad part about Social Security is that it forces people to rely on a relatively measly average payment of $1422/month or $17,532 per year post-retirement at age 66. (In 2027, seniors have to be 67 to receive full benefits)

Fervent opponents of Social Security reform have kept tens of millions of retirees from living a far more comfortable life in retirement than they are today. With the same amount of money paid into OASDI, a middle-income retiree could retire with a nest egg of hundreds of thousands, perhaps over a million, dollars had they been able to invest those same dollars in a traditional retirement account for 40 years.

Absent any changes today, Millennials will be looking at more dismal rates of return on their OASDI payroll tax ‘contributions’ (sic) 35 years in the future.

What happens when a recession hits and stock portfolios take a beating?

The government could act as a backstop just as it did during the banking crisis of 2008-09 and guarantee a payment each month to get retirees back to at least their projected average monthly Social Security check based on what they would have received from the old system and calculation. 

Not full payment; just a partial payment to make them whole.

Once the economy and stock and bond markets recover, those emergency payments can stop.

There really is a basic fundamental question to be asked here.  Is it fair to force American citizens to accept a substandard system of funding their retirement when there is a much more lucrative system available to them?

Based on aging demographics and declining birth rates, the majority of OECD countries have come to the conclusion that they must expand and encourage mandatory private retirement accounts in addition to public funds. (see chart above)

The United States does not allow any private investment of OASDI tax payments into personal accounts under Social Security. None. Whatsoever.

This Christmas when Millennials go home to talk with their enlightened Boomer parents, they should tell them they love them and want them to keep their substandard Social Security benefits for as long as they live. No one wants to, or will, ever change that.

However, Millennials and future generations should want to do better. Far better. For each person individually and, then by happy extension, for every other American who will grow old with them.

* https://qz.com/860988/there-is-a-progressive-case-for-privatizing-social-security-in-the-us/


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