Here are my results from Heritage’s Social Security Calculator:
You can expect to pay $350,881 in Social Security taxes over your working life for retirement and survivors benefits. For those taxes, you can expect to receive $2,467 a month in Social Security retirement benefits. Your rate of return under today’s Social Security is -3.56%.
However, if you had been able to invest your Social Security taxes in a Personal Retirement Account (PRA), you would have had a total of $1,401,434 when you retired. Your monthly benefits would have been $11,416. You lost $8,948 a month.
Now, what’s supposed to be the problem with this, exactly, especially when much poorer folk than me can also expect to be doing a lot better? Why are so many people so eager to oppose a program that makes almost everyone better off? I find it truly baffling.
Will,
That’s nothing. If you had property insurance last year, and didn’t have a break in or a fire, your rate of return was negative infinity!
Matthew Yglesias finds these numbers a little fishy.
In theory, Private Retirement Accounts look great using this calculator. But if you look at how it’s being calculated, the results are questionable:
1. It assumes half your money is invested in US government bonds, ie, the same thing it’s invested in now. Hmmm
2. It assumes the other half is invested in Blue Chip, big-cap companies’ stocks. The total value of decent US companies right now is about $8 trillion. Imagine if everyone had private accounts now. According to the Heritage calculator, that’s over $100 trillion, or more than the total market value of every asset in the world.
The sad fact is, our economy doesn’t produce enough solid assets for all of America’s workers to invest in. It doesn’t help that foreigners see the US as the safest place to invest, either.
If everyone had PRA’s, we would soon be forced to put our money in investments far riskier than the S&P 500 companies…
And if I took every penny I’ve spent on morning coffee and put it in the stock market, I’d be able to buy an office building in Manhattan.
Does Heritage take into account that, under the Micha Ghertner Federal Insolvency Plan of 2040, the half of your retirement account invested in US Bonds will only get you a few square feet of drilled-over Alaskan tundra and a $75 hammer?
Am I the only one who sees a flaw in the logic of saying that there aren’t enough assets in which we can invest? Is someone trying to say with a straight face that there is $100 million to do something with, and we ought to give it to the government rather than give it to corporations? Given, there is a logistics problem in ploying that much into the stock market. From whom will we buy the shares if that much excess is not willing to be sold. If all were invested at once, it would lead to an artificial increase in stock prices which would lead to a subsequent crash and loss for SS retirees. If the government set up a temporary commission to invest in companies that were willing to sell equity, including new startups and existing companies, the money could be invested safely into the economy and would help grow the economy. Giving any money for the government to spend seems like a terrible idea if the money could be given to someone else, no matter how difficult the alternative is.
Ben,
Are you saying with a straight face that the government could set up a unbiased commision to quietly negotiate the placement of trillions of dollars effectively in companies?
Most startups go under with in five years. Existing comapnies have all the money they need through profits to finance expansion.
There is already an excess of cash in the world financial markets. Do you really think that foreigners would have bought $500 billion worth of US debt last year if there were thousands of Microsofts that just needed a few bucks to get started?
The US Stock market alreadys reflects this surplus of funds. Do you honestly think that EBay, essentially a website with a data base, is worth $75 billion? Can you say internet bubble 2.0 ready to burst?
Why the defenders of the SS status quo think they have anything to gain by trying to portray it as an insurance plan, I cannot imagine. What could be more miserable than an insurance policy that gives you a worse return than a money-market fund even if it pays off?
Monkeyboy–
You can change how your PRA is allocated on the calculator. 50/50 in bonds and blue chips is just the default. I set it to resemble the allocation in my actual retirement fund (which I pay into in addition to SS), and the (estimated) performance over the long haul is much better.
As for the US economy having enough for everybody to invest in…I’m no economist, but if everyone was investing in the private sector (instead of giving the government a very low-interest load), I think the private sector might grow a little. No?
Um, low interest loan, that is…
It’s possible, Brian, but I don’t think so.
Here’s why:
Domestic companies made about $800 billion last year. They paid out about $400 billion to shareholders in dividends and kept the rest to finance expansion. So, if they wanted it, domestic companies already have a source of funding…their own profits.
Out of the approximately $8.6 trillion in disposable personal income in the US, we managed to save just $40 billion last year. Tack on the increase in consumer debt and you find that Americans are spending every cent they make now.
Who is going to buy the output of the new companies formed by the increase in funding from SS private accounts? We’re tapped already…
The US government borrowed $500 billion from the rest of the world last year. This is over 80% of the savings of the ENTIRE WORLD. Private Social Security accounts will require, conservatively, $2 trillion in new funding the first decade alone.
The only place this can come from is if Americans or foreigners consume less…hardly a scenario for a period of business expansion.
The US trade defecit was $600 billion last year, ie, American companies got their asses kicked by foreign companies. I assume private SS accounts will only get to invest in US companies, are we really gonna buy a new clothing factory in China with our SS accounts?
We live in a global economy now. Of the 24 companies listed on US stock markets worth over $100 billion, 8 are foreign. Accounts limited to investing in US stocks will miss out on much of the gains in value made by companies in the coming years…
And finally, anyone who wants to start a company, can do so. They can use their savings, borrow from relatives or max out credit cards. If their idea is good enough, there are plenty of venture capitalists ready to help out.
The only thing increasing the supply of money available to start new companies will do is fund the starting of companies that nobody is willing to finance now…most new companies go broke rather rapidly. Do we really want to fund the companies nobody will fund now?
Lol…thanks for the link. I have never been so depressed in my life. OF course, this seems to be an underestimation. I am twenty-three years old. The likelihood of me getting ANYTHING is about as high as the likelihood of me being elected President (maybe lower, I am a conservative–we have a good track record on the latter).
Paul asks: What could be more miserable than an insurance policy that gives you a worse return than a money-market fund even if it pays off?
The chances of it paying off are 100%. When people say it’s an insurance policy, they mean a social insurance policy, not an individual insurance policy. You might object in principle to the existence of social insurance, but that doesn’t mean you get to make claims about it maybe not paying off.
Similarly, John says: The likelihood of me getting ANYTHING is about as high as the likelihood of me being elected President.
According to the Social Security trustees, in the status quo scenario and with their (underestimated) projections of growth, you would get somewhere between 75-80% of Social Securities obligations to you. This is more, in real dollars, than current retirees get. Please explain the possible scenario under which you get nothing.
“you would get somewhere between 75-80% of Social Securities obligations to you…Please explain the possible scenario under which you get nothing.”
Why don’t you explain th scenario in which paying 75-80% of what is owed is something to brag about?
When the sham companies the republicans set up to receive Social Security funds go under…we’ll be happy to get 10 cents on the dollar.
Washerdreyer clears things up nicely: When people say SS is an insurance policy, they mean it’s really nothing at all like an insurance policy but they’re calling it one to avoid having to judge its merits as the defined-benefit pension plan it actually is.
Tom-
I didn’t know that refuting a false claim was bragging, thank you for clearing that up.
Paul-
Maybe I’m confused (not saying that for rhetorical flourish) but wouldn’t a privatization scheme function as a switch from defined benefit to defined contribution? If privatization would function as a defined benefit scheme in which no person’s benefit is less than it would be under the status quo and some people’s benefits are higher, I’ve been misled. Also, it’s defined benefit plus additional disability and other types of insurance, but I assume you just mean the primary function of social security.
Sorry, didn’t fill in the name field for the above post.
Yes, privatization– to the extent that it supplants OASI as we know it– would represent a change from defined-benefit to defined-contribution. But I thought we were talking about existing OASI. The idea of comparing that to actual insurance was Gareth’s, not mine; I was just pointing out that the comparison is absurd. You can call SS “social insurance” if it suits you, just as you can call an apple a “social orange”, but the label does nothing to improve its resemblance to actual insurance (which is slight).
What Gareth did is a rhetorical excess in response to Will’s at least equivalent excess of ignoring the actual purpose of social security in his post. Here’s a nice quote from Dan Froomkin in yesterday’s WaPo on what it means to describe OASI as “social insurance.
“Sir, Social Security isn’t really a retirement plan, it’s more like an insurance plan, making sure that the elderly, the disabled, their dependents and survivors don’t go destitute. Some people get a lot more out than they put in; others get a lot less; it’s like insurance that way.”
A defined benefit plan has insurance aspects a defined contribution plan doesn’t because the beneficiary shifts investment risk and the risk of living longer than average (SS has additional insurance features). Since both of these risks are bad, a rational person will prefer a defined benefit plan to a defined contribution plan with the same expected rate of return.
Will knows this. He also knows that SS is not pay-as-you-go, that actuarial analysis is not just guessing and that Social Security faces no greater risk of insolvency than the US Government itself. He doesn’t care because he wants to social engineer Americans into a mass investment class. He calls this the “moral argument”.
What I don’t get is why the moral argument requires so much sophistry…
BTW, you need to respond to the point made by the numerate members of the liberal blogosphere: the whole calculator is based on 4% *real* annual salary growth. See Atrios.
“Please explain the possible scenario under which you get nothing.”
If you die before you hit 65, you get bupkis.
Next question?
And yeah, you can say it’s “insurance”, but it’s a funny kind of insurance that pays off if you manage to avoid disaster for 65 years. Especially if you’re forced into it…
“Please explain the possible scenario under which you get nothing.”
If you die before you hit 65, you get bupkis.
Next question?
And yeah, you can say it’s “insurance”, but it’s a funny kind of insurance that pays off if you manage to avoid disaster for 65 years. Especially if you’re forced into it…
Good job. I think the whole argument isn’t about Social Security. It’s about winning elections. If Bill Clinton came up with this idea in 1998, Krugman and others would be lovin’ it.
it’s a funny kind of insurance that pays off if you manage to avoid disaster for 65 years.
It’s not so funny if you outlive your savings.
Especially if you’re forced into it…
Tu quoque, my friend, since you are defending a forced defined contribution scheme.
Anyhow, there is a good reason why insurance is (sometimes) more efficient if people are forced into it. It’s called adverse selection.
“It assumes half your money is invested in US government bonds, ie, the same thing it’s invested in now. Hmmm”
Soc Sec is NOT ‘invested’ in bonds right now. It’s not ‘invested’ in anything. The surplus is spent and the ‘bonds’ represent an IOU from one portion of the gov’t to another. To pay that off, the gov’t will have to either raise taxes or cut benefits.
Jason,
All financial assets are IOUs. IOUs from the US Federal Government are generally considered the safest financial assets around.
Sure, to pay off US Govt bonds, the US Govt will eventually have to either raise taxes or reduce spending (almost certainly, raise taxes BTW). That is solely because of George W. Bush and his enablers in Congress.
But how is that an argument that the Bonds are not really financial assets? They are only not really financial assets if the US Govt is going to default on them. That would be unconstitutional, and would result in a global financial crisis.
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Will,
That’s nothing. If you had property insurance last year, and didn’t have a break in or a fire, your rate of return was negative infinity!
Matthew Yglesias finds these numbers a little fishy.
In theory, Private Retirement Accounts look great using this calculator. But if you look at how it’s being calculated, the results are questionable:
1. It assumes half your money is invested in US government bonds, ie, the same thing it’s invested in now. Hmmm
2. It assumes the other half is invested in Blue Chip, big-cap companies’ stocks. The total value of decent US companies right now is about $8 trillion. Imagine if everyone had private accounts now. According to the Heritage calculator, that’s over $100 trillion, or more than the total market value of every asset in the world.
The sad fact is, our economy doesn’t produce enough solid assets for all of America’s workers to invest in. It doesn’t help that foreigners see the US as the safest place to invest, either.
If everyone had PRA’s, we would soon be forced to put our money in investments far riskier than the S&P; 500 companies…
And if I took every penny I’ve spent on morning coffee and put it in the stock market, I’d be able to buy an office building in Manhattan.
Does Heritage take into account that, under the Micha Ghertner Federal Insolvency Plan of 2040, the half of your retirement account invested in US Bonds will only get you a few square feet of drilled-over Alaskan tundra and a $75 hammer?
Am I the only one who sees a flaw in the logic of saying that there aren’t enough assets in which we can invest? Is someone trying to say with a straight face that there is $100 million to do something with, and we ought to give it to the government rather than give it to corporations? Given, there is a logistics problem in ploying that much into the stock market. From whom will we buy the shares if that much excess is not willing to be sold. If all were invested at once, it would lead to an artificial increase in stock prices which would lead to a subsequent crash and loss for SS retirees. If the government set up a temporary commission to invest in companies that were willing to sell equity, including new startups and existing companies, the money could be invested safely into the economy and would help grow the economy. Giving any money for the government to spend seems like a terrible idea if the money could be given to someone else, no matter how difficult the alternative is.
Ben,
Are you saying with a straight face that the government could set up a unbiased commision to quietly negotiate the placement of trillions of dollars effectively in companies?
Most startups go under with in five years. Existing comapnies have all the money they need through profits to finance expansion.
There is already an excess of cash in the world financial markets. Do you really think that foreigners would have bought $500 billion worth of US debt last year if there were thousands of Microsofts that just needed a few bucks to get started?
The US Stock market alreadys reflects this surplus of funds. Do you honestly think that EBay, essentially a website with a data base, is worth $75 billion? Can you say internet bubble 2.0 ready to burst?
Why the defenders of the SS status quo think they have anything to gain by trying to portray it as an insurance plan, I cannot imagine. What could be more miserable than an insurance policy that gives you a worse return than a money-market fund even if it pays off?
Monkeyboy–
You can change how your PRA is allocated on the calculator. 50/50 in bonds and blue chips is just the default. I set it to resemble the allocation in my actual retirement fund (which I pay into in addition to SS), and the (estimated) performance over the long haul is much better.
As for the US economy having enough for everybody to invest in…I’m no economist, but if everyone was investing in the private sector (instead of giving the government a very low-interest load), I think the private sector might grow a little. No?
Um, low interest loan, that is…
It’s possible, Brian, but I don’t think so.
Here’s why:
Domestic companies made about $800 billion last year. They paid out about $400 billion to shareholders in dividends and kept the rest to finance expansion. So, if they wanted it, domestic companies already have a source of funding…their own profits.
Out of the approximately $8.6 trillion in disposable personal income in the US, we managed to save just $40 billion last year. Tack on the increase in consumer debt and you find that Americans are spending every cent they make now.
Who is going to buy the output of the new companies formed by the increase in funding from SS private accounts? We’re tapped already…
The US government borrowed $500 billion from the rest of the world last year. This is over 80% of the savings of the ENTIRE WORLD. Private Social Security accounts will require, conservatively, $2 trillion in new funding the first decade alone.
The only place this can come from is if Americans or foreigners consume less…hardly a scenario for a period of business expansion.
The US trade defecit was $600 billion last year, ie, American companies got their asses kicked by foreign companies. I assume private SS accounts will only get to invest in US companies, are we really gonna buy a new clothing factory in China with our SS accounts?
We live in a global economy now. Of the 24 companies listed on US stock markets worth over $100 billion, 8 are foreign. Accounts limited to investing in US stocks will miss out on much of the gains in value made by companies in the coming years…
And finally, anyone who wants to start a company, can do so. They can use their savings, borrow from relatives or max out credit cards. If their idea is good enough, there are plenty of venture capitalists ready to help out.
The only thing increasing the supply of money available to start new companies will do is fund the starting of companies that nobody is willing to finance now…most new companies go broke rather rapidly. Do we really want to fund the companies nobody will fund now?
Lol…thanks for the link. I have never been so depressed in my life. OF course, this seems to be an underestimation. I am twenty-three years old. The likelihood of me getting ANYTHING is about as high as the likelihood of me being elected President (maybe lower, I am a conservative–we have a good track record on the latter).
Paul asks: What could be more miserable than an insurance policy that gives you a worse return than a money-market fund even if it pays off?
The chances of it paying off are 100%. When people say it’s an insurance policy, they mean a social insurance policy, not an individual insurance policy. You might object in principle to the existence of social insurance, but that doesn’t mean you get to make claims about it maybe not paying off.
Similarly, John says: The likelihood of me getting ANYTHING is about as high as the likelihood of me being elected President.
According to the Social Security trustees, in the status quo scenario and with their (underestimated) projections of growth, you would get somewhere between 75-80% of Social Securities obligations to you. This is more, in real dollars, than current retirees get. Please explain the possible scenario under which you get nothing.
“you would get somewhere between 75-80% of Social Securities obligations to you…Please explain the possible scenario under which you get nothing.”
Why don’t you explain th scenario in which paying 75-80% of what is owed is something to brag about?
When the sham companies the republicans set up to receive Social Security funds go under…we’ll be happy to get 10 cents on the dollar.
Washerdreyer clears things up nicely: When people say SS is an insurance policy, they mean it’s really nothing at all like an insurance policy but they’re calling it one to avoid having to judge its merits as the defined-benefit pension plan it actually is.
Tom-
I didn’t know that refuting a false claim was bragging, thank you for clearing that up.
Paul-
Maybe I’m confused (not saying that for rhetorical flourish) but wouldn’t a privatization scheme function as a switch from defined benefit to defined contribution? If privatization would function as a defined benefit scheme in which no person’s benefit is less than it would be under the status quo and some people’s benefits are higher, I’ve been misled. Also, it’s defined benefit plus additional disability and other types of insurance, but I assume you just mean the primary function of social security.
Sorry, didn’t fill in the name field for the above post.
Yes, privatization– to the extent that it supplants OASI as we know it– would represent a change from defined-benefit to defined-contribution. But I thought we were talking about existing OASI. The idea of comparing that to actual insurance was Gareth’s, not mine; I was just pointing out that the comparison is absurd. You can call SS “social insurance” if it suits you, just as you can call an apple a “social orange”, but the label does nothing to improve its resemblance to actual insurance (which is slight).
What Gareth did is a rhetorical excess in response to Will’s at least equivalent excess of ignoring the actual purpose of social security in his post. Here’s a nice quote from Dan Froomkin in yesterday’s WaPo on what it means to describe OASI as “social insurance.
“Sir, Social Security isn’t really a retirement plan, it’s more like an insurance plan, making sure that the elderly, the disabled, their dependents and survivors don’t go destitute. Some people get a lot more out than they put in; others get a lot less; it’s like insurance that way.”
A defined benefit plan has insurance aspects a defined contribution plan doesn’t because the beneficiary shifts investment risk and the risk of living longer than average (SS has additional insurance features). Since both of these risks are bad, a rational person will prefer a defined benefit plan to a defined contribution plan with the same expected rate of return.
Will knows this. He also knows that SS is not pay-as-you-go, that actuarial analysis is not just guessing and that Social Security faces no greater risk of insolvency than the US Government itself. He doesn’t care because he wants to social engineer Americans into a mass investment class. He calls this the “moral argument”.
What I don’t get is why the moral argument requires so much sophistry…
BTW, you need to respond to the point made by the numerate members of the liberal blogosphere: the whole calculator is based on 4% *real* annual salary growth. See Atrios.
“Please explain the possible scenario under which you get nothing.”
If you die before you hit 65, you get bupkis.
Next question?
And yeah, you can say it’s “insurance”, but it’s a funny kind of insurance that pays off if you manage to avoid disaster for 65 years. Especially if you’re forced into it…
“Please explain the possible scenario under which you get nothing.”
If you die before you hit 65, you get bupkis.
Next question?
And yeah, you can say it’s “insurance”, but it’s a funny kind of insurance that pays off if you manage to avoid disaster for 65 years. Especially if you’re forced into it…
Good job. I think the whole argument isn’t about Social Security. It’s about winning elections. If Bill Clinton came up with this idea in 1998, Krugman and others would be lovin’ it.
it’s a funny kind of insurance that pays off if you manage to avoid disaster for 65 years.
It’s not so funny if you outlive your savings.
Especially if you’re forced into it…
Tu quoque, my friend, since you are defending a forced defined contribution scheme.
Anyhow, there is a good reason why insurance is (sometimes) more efficient if people are forced into it. It’s called adverse selection.
“It assumes half your money is invested in US government bonds, ie, the same thing it’s invested in now. Hmmm”
Soc Sec is NOT ‘invested’ in bonds right now. It’s not ‘invested’ in anything. The surplus is spent and the ‘bonds’ represent an IOU from one portion of the gov’t to another. To pay that off, the gov’t will have to either raise taxes or cut benefits.
Jason,
All financial assets are IOUs. IOUs from the US Federal Government are generally considered the safest financial assets around.
Sure, to pay off US Govt bonds, the US Govt will eventually have to either raise taxes or reduce spending (almost certainly, raise taxes BTW). That is solely because of George W. Bush and his enablers in Congress.
But how is that an argument that the Bonds are not really financial assets? They are only not really financial assets if the US Govt is going to default on them. That would be unconstitutional, and would result in a global financial crisis.