.Social Security: What You'll get when you retire An in-depth look at potential outcomes for a program all workers hope they can count on By SHANNON BUGGS Copyright 2005 Houston Chronicle GRAPHIC • Retirement scenarious: A look at what six one-earner couples at age 65 retiring at selected years through 2075 will receive each month from the Social Security System. On or near your birthday, the statement comes in the mail sharing the news of what the Social Security Administration has in store for you. It estimates what your monthly check would be if you become disabled, retire early or stop working at full retirement age. That's your starting line, the pre-retirement income you don't have to worry about making up with a pension or personal savings. But the statement comes with a warning: The numbers are good only if the system doesn't fail. Right now, Social Security brings in more money than it pays out, and the surplus is invested in Treasury bonds held by the program's trust funds. In either 2018 or 2022, the amount of taxes collected to fund Social Security, known as payroll taxes, will be less than the benefits promised. At that time, the trust fund will begin cashing in its bonds and using the proceeds to make up the difference. But that money will be used up by 2042 or 2052. Then, the system will be insolvent and only able to pay 73 percent of the future retirees' benefits. So policy-makers are debating ways to reform Social Security. A discussion of the pluses and minuses of four benefit scenarios, including keeping the system the way it is, follows. The changes all share one thing: moving back the starting line on amassing retirement income. Current system • How it works: A monthly payment is calculated using an individual's average monthly earnings based on his 35 highest-income working years and adjusted to reflect how wages grew throughout the economy during that time. Social Security then replaces a portion of that average monthly income, which last year broke down to 90 percent of the first $612, then 32 percent of anything between $613 and $3,689 and 15 percent of anything above $3,689. These income amounts, known as bend points, change every year. The range of benefits paid gets higher with each successive generation of retirees as a reflection of the economic tendency of wages to rise faster than increases in the prices of consumer goods, known as inflation. As of now, Social Security checks provide 24 percent to 57 percent of pre-retirement income for those who retire at age 65. • Upside: Benefits stay the same now and grow in the future at the same pace as average wages. Also, there is no investment risk because the Social Security assets will continue to be placed in Treasury bonds. That stability allows workers to accurately predict how much of their pre-retirement income will be replaced by Social Security. • Downside: Taxes would go up, which means your take-home pay in your working years will be less. Congress could require all workers and their employers to contribute more to Social Security by raising payroll taxes about 2 percent. Or lawmakers could make the wealthy pay more into the system by changing the cap on payroll taxes. Right now, payroll taxes are collected on only the first $90,000 of income. That limit could be raised to, say, $150,000 or $250,000, or removed completely so all wages are taxed. Another option is to cut benefits by moving the early retirement age from 62 to 64 or the full retirement age from 67 to 70, but that also may prove to be politically unpalatable. • Political climate: The White House has a habit of pushing tax cuts, not tax increases. "The reason the administration is so reluctant to raise taxes is that it provides less money for individuals to consume and less incentive for people to work and produce, and therefore make the economy grow," says Craig Copeland, director of the Social Security Research Program at the Employee Benefits Research Institute. "But will an additional 1 percent coming out of your check really make you want to work less or a company be less willing to hire you, I don't know." Do nothing, risk insolvency • What would happen: The current system stays in place with the same payroll tax rate and the same retirement ages. But according to the worst-case scenario projections of the trustees that run Social Security, the program would become insolvent in 2042. That's when the Social Security Trust Fund will be exhausted and stop making the difference between the retirement benefits paid and the smaller amount of taxes collected. The projections are for a one-time benefit cut of 28 percent that year for all new retirees and future retirees that will bring benefits in line with revenues. Anyone who retires before 2042 would not see their Social Security checks slashed. • Upside: All the gloom-and-doom projections could be wrong, and new methods of measuring the health of the economy, growth of the work force and life expectancy of retirees could mean rosier scenarios of Social Security's future will come true. Already, inflation estimates are being revised down to reflect changes in consumer buying habits and quality improvements in goods. Maybe longevity estimates have overstated the impact of technology and will also come down. Immigration could also play a positive role, adding more wage earners who'd contribute to the system. The most conservative estimates peg immigration at 900,000 documented and undocumented workers joining the U.S. population every year, says Lee Price with the Economic Policy Institute. "The most optimistic estimate is that we will have 1.3 million immigrants every year from now until the 75th year," he says. "So the estimates are way off on immigration." • Downside: Living with uncertainty about the future of Social Security for another 30 or 40 years. Although the projections forecast just one cut, there will certainly be years when revenues and costs fluctuate, and benefits may be adjusted to reflect those changes. • Political climate: Regardless of beliefs about Social Security being in crisis or not, no politician is seriously advocating taking a wait-and-see approach to dealing with the nation's most popular government program. Indexing benefits to prices • How it works: A monthly payment would be calculated using the average increase in consumer prices over a worker's career rather than wages. By keeping pace with inflation, Social Security benefits will basically remain constant in real terms. That means the standard of living of each future generation of retirees would not improve over retirees today. • Upside: The Social Security shortfall would be closed without raising taxes. Social Security benefits would remain nearly risk-free because they would still be invested only in Treasury bonds. • Downside: Converting to price indexing effectively cuts Social Security benefits by slowing the growth of future benefits by about 40 percent. And because inflation tends to trail wages, Social Security benefits would replace less and less of a retiree's pre-retirement income as the years go by. A Congressional Research Service report concluded that if the Social Security program used price indexing instead of wage indexing from its inception in 1935, the average check for a retiree today would be just $425 a month. It also concludes that today's poverty rate among American retirees would be nearly triple its current level of 3.6 million. • Political climate: Chopping retirement benefits 40 percent without the anesthesia of diverting a portion of payroll taxes into individual investment accounts is too cruel a cut for many on Capitol Hill. "There's been discussion of only price indexing at a certain income level, but that would be a means test," says Laurel Beedon, an AARP senior policy adviser in Washington. "And means testing flies in the faceof the concept of Social Security." Price indexed benefit with individual account • How it works: Social Security benefits would be calculated using inflation as an index, which would result in across-the-board reductions. Workers could try to make up those cuts by electing to invest 4 percent, up to $1,000 of their payroll taxes, in stocks and bonds through newly created individual investment accounts. The stock choices are likely to be limited to index funds and other equity investing strategies to minimize risk. Shifting where payroll tax money goes creates immediate budget problems requiring the government to borrow trillions of dollars. The fees for those loans will be paid back by the workers who choose to open individual accounts when they retire and convert the account into an inflation-indexed annuity. • Upside: Workers gain the potential to raise their Social Security benefits by investing in stocks and bonds rather than just bonds. Retirees also could accumulate money in individual accounts that if not used entirely during their lifetime could be transferred at death to a loved one. • Downside: Creating individual investment accounts with payroll taxes will not close the Social Security shortfall, but the cuts from price indexing could. However, that solution creates another problem: bigger budget deficits for the U.S. government. For the retiree, the bill on the increased borrowing comes due when workers retire. Their individual accounts must earn a return higher than the inflation rate plus 2 percent — a proposed fee the government would charge. An analysis by GoldmanSachs concluded that the presidential commission's investment return assumptions for the most aggressive portfolio it recommended for the individual accounts "look too high" at a fee-adjusted return of 4.6 percent per year. Goldman Sachs figured a better assumption would be 3.6 percent. Under the commission's scenario, a retiree keeps 1.6 percent of the account's return. Goldman Sachs estimates the reward for taking on the risk is less than 1 percent. Also, short-term movements in stock prices could have a long-term impact on an individual's retirement. If an account is converted into an annuity when stock prices are low, benefits will be smaller throughout retirement than if the conversion happened when prices were higher. • Political climate: It's yet to be seen if Americans are willing to pay the high costs in fees and budget deficit increases to partially privatize the Social Security System.
I know we have talked about SS once or twice in this forum in the last few weeks. BUT all the conversations have been with a lot of conjecture because very few details have been available about W's proposed plan. I have paid some attention to this subject prior to this article and it seems to outline very well what our current situation is and how W's plan would change things. I wanted to see what people really think about W's proposal after knowing a little more facts. I don't mean to really get into a political debate of Pro/Anti bush. I want to discuss the merits of the new proposed plan. To me, it seems very unattractive so I'm curious why anybody would support it. Please convince me why this is a good plan. I don't see it.
I have to admit that I have spent most of my working life thinking that SS is just another crappy way for the govt to fleece me. Thinking this, I have essentially been estate planning for the past 6 years (woulda been more, but being a Internet slacker in the early 90s wasn't very profitable). If I am alive in 2042, I hope that my .73 on the dollar is only paying for my $30 movie tickets and $10 cups of coffee. Of course a good Stephen King Superflu could make all of this moot.
Very well written article. Personally, I believe that if we used the money that Bush is planning to borrow to convert SS into a "private accounts" system to pay down the debt instead, we will be able to reclaim the over $200 billion per year that is now dedicated to intereest on the debt. With those savings, we will be able to shore up SS easily without introducing the unnecessary risk of investing in the stock market. Of course, I also believe that we could reduce the dependance of our elderly on SS if we changed our system of taxation to reward savings, as a consumption tax would. Either way, the Bush plan is not the way to go, IMO.
I agree with most that this is a fairly in-depth look at SS, but ... The SS trust fund is unfunded. It is time for us to stop pretending otherwise. The author suggests that But that money will be used up by 2042 or 2052. Then, the system will be insolvent and only able to pay 73 percent of the future retirees' benefits. and But according to the worst-case scenario projections of the trustees that run Social Security, the program would become insolvent in 2042. That's when the Social Security Trust Fund will be exhausted and stop making the difference between the retirement benefits paid and the smaller amount of taxes collected. The projections are for a one-time benefit cut of 28 percent that year for all new retirees and future retirees that will bring benefits in line with revenues. IIRC in the 1960s, SS lost its independent accounting and was merged with the general revenues. Since then the SS trust fund had not been funded and exists only as a paper entity. From the 1960s to 2042, the federal government has been dipping into the SS tax revenues to pay for other things. After 2042, the shoe will be on the other foot. I see no reason for alarm.
i guess its 'unfunded' but it bought government bonds. and us government bonds are the safest investments in the world. so those ious are fairly secure. however this does mean we need to fix out debt issues cause if we keep increasing the debt and expect to pay for social security as well it will be a pain. by then we'll hafta raise taxes. and no worries no. the government can't tap into the fund after 2020ish because the outflow will increase and SS administration will actually have to request the money from the bonds... plus where would you like the trillions and trillions of dollars of surplus to be kept? i mean you want some interest on it via the bond method right? you dont want it to be sitting in a 'fund' acquiring no interest.
The federal government took money that was there and bought its bonds which also do not exist. In particular, the US government did not buy its own bonds on the open market from the surplus in SS revenues and place those bonds into safe keeping. The federeal government does make paper entries for the *virtual* bonds that it buys from itself. It also credits those same paper accounts with interest from the bonds. Think monopoly money. BTW, in 2018 or so the federal government will start to spend more than it takes in for SS. Everybody wants you to believe that the excess funds will come from the SS trust fund. The truth is that the money will come from the general revenues. This is when the problems will start. By 2042 when the trust runs out of monopoly money is a non-event, since for the preceding 24 years an increasingly big chunk of money will had to have been taken out of the general revenues.
Progressives are equally delusional about SS ... How to Talk to a Conservative About Social Security Think Progress. Posted February 14, 2005. Enough facts to defend against the onslaught of misinformation about Social Security. Unlocking the System Vanessa Huang, WireTap The White House and their deep-pocketed allies have launched a $35 million public relations effort to spread misinformation about President Bush’s Social Security privatization scheme. This fact sheet will arm you with all the facts you’ll need to take them on. Fiscal Outlook Claim: “By the year 2042, the entire system would be exhausted and bankrupt.” [President Bush, 2/2/05] Fact: In 2042, enough new money will be coming in to pay between 73-80 percent of promised benefits. Even with this reduction, new retirees will still receive more money, in inflation-adjusted dollars, than today’s beneficiaries. [The Washington Post, 2/5/05] Claim: “In the year 2018, for the first time ever, Social Security will pay out more in benefits than the government collects in payroll taxes.” [President Bush, 12/11/04] Fact: “In 14 of the past 47 years, including 1975 to 1983, Social Security paid out more in benefits than the government collected in payroll.” [MSNBC, 1/14/05] Fact: Under Bush’s plan, expenditures will begin to exceed revenues even earlier, in 2012. [The New York Times, 2/4/05] Claim: “Under the current system, today’s 30-year old worker will face a 27 percent benefit cut when he or she reaches normal retirement age.” [GOP Guide to Social Security Reform, 1/27/05] Fact: According to the Congressional Budget Office, younger workers would receive better benefits from Social Security as it exists now, even if nothing changes, than from President Bush’s private accounts plan. [Economic Policy Institute, 2/05] The President’S Plan / Private Accounts Claim: “As we fix Social Security, we also have the responsibility to make the system a better deal for younger workers. And the best way to reach that goal is through voluntary personal retirement accounts.” [President Bush, 2/2/05] Fact: Analysis of the plan so far does not prove the accounts would be a better deal for anyone not working on Wall Street. Workers who opt for the private accounts would recover forfeited benefits through their accounts only “if their investments realized a return equal to or greater than the 3 percent earned by Treasury bonds currently held by the Social Security system.” But CBO factors out stock market risks to assume a 3.3 percent rate of return. With 0.3 percent subtracted for expected administrative costs on the account, “the full amount in a worker’s account would be reduced dollar for dollar from his Social Security checks, for a net gain of zero.” [The Washington Post, 2/4/05] Claim: “You’ll be able to pass along the money that accumulates in your personal account, if you wish, to your children or grandchildren.” [President Bush, 2/2/05] Fact: Most lower-income workers will be required to purchase government lifetime annuities, financial instruments that provide a guaranteed monthly payment for life but that expire at death. Money in these annuities cannot be passed on to heirs. [The New York Times, 2/3/05] Claim: “We must pass reforms that solve the financial problems of Social Security once and for all.” [President Bush, 2/2/05] Fact: “A Bush aide, briefing reporters on the condition of anonymity [said] that the individual accounts would do nothing to solve the system’s long-term financial problems.” The long-term gap in revenue would “have to be closed through benefit cuts that have yet to be detailed.” [LAT, 2/3/05; The Washington Post, 2/5/05] Claim: “A personal account would be your account, you would own it, and the government could never take it away.” [President Bush, 2/8/05] Fact: Bush’s Social Security plan is a far cry from the private ownership he’s touting, however. For example, instead of private plans that let Americans control their own investments, there are tight restrictions on which conservative stocks and bonds the public will be allowed to buy. And, as The New York Times reports, “the more restrictions there are, the harder it would be for people to achieve the outsized returns the administration has generally promoted to sell the public on private accounts.” [The New York Times, 2/6/05] Claim: “Best of all, the [private] accounts would be replacing the empty promises of government with the real assets of ownership.” [President Bush, 2/8/05] Fact: Social Security trust funds “hold nothing but U.S. Treasury securities,” recognized as “the safest, most reliable investment worldwide.” [Century Foundation, 1/26/05] Claim: “The problem that we now face is not one that we can tax our way out of, for a very simple reason: The costs and the current program are growing faster than the underlying tax base. So if we were to raise taxes today to deal with it, and the costs of the program continued to grow faster than the tax base, then in the future, future generations would simply have to come back and raise taxes again.” [Senior White House official, press conference, 2/3/05] Fact: An alternative proposal by Peter Diamond and Peter Orszag would resolve Social Security’s funding problems directly and permanently through modest tax increases. The Congressional Budget Office states that, “under Diamond-Orszag, the trust fund balance would always be positive and scheduled benefits would be fully financed.” [CBO, 12/22/04] History Claim: “Social Security was a great moral success of the 20th century, and we must honor its great purposes in this new century.” [President Bush, 2/2/05] Fact: Conservatives have been trying to gut Social Security since its inception. Both Barry Goldwater and Ronald Reagan endorsed privatization in 1964. In 1983, the Cato Institute laid out a privatization plan similar to President Bush’s, stating, “We will meet the next financial crisis in Social Security with a private alternative ready in the wings.” [Miami Herald, 2/7/05] Rhetoric Claim: “I think it’s important for people to be open about the truth when it comes to Social Security.” [President Bush, 2/4/05] Fact: The Bush administration has lobbied hard for privatization while being notably closemouthed about the details. [The Washington Post, 2/6/05] Fact: The Wall Street Journal reports the White House is quietly assembling a coalition of deep-pocketed allies “that will privately raise $35 million for an advertising and lobbying effort to push the politically risky measure through Congress.” [Wall Street Journal, 2/4/05] Claim: “The role of a president is to confront problems – not to pass them on to a future president, future Congress, or a future generation.” [President Bush, 2/4/05] Fact: Dick Cheney admits trillions of dollars in future borrowing will be necessary to cover the cost of establishing private accounts. This deficit would have to be repaid by today’s younger workers. [The New York Times, 2/6/05]
Apparently nobody actually supports this SS plan judging by the responses in this thread. The typically vocal republicans have gone mute. Why?
well isn't it all monopoly money when we talk about 2-3 trillion dollar budgets? so of course all this is monopoly. but yes from 2020ish the government will spend a lil bit more than it takes in. it wont be THAT much more. dont have a war in iraq and you can use that. and regardless its just more motivation to get our budget in order so it can handle it then. the fact remains that we either have to raise taxes or cut benefits. and if we raise the 90 thousand dollar cap...we can extend social security indefinitely. and frankly im good with that.
but what are you gonna reduce? i think the biggest problem is medicare/medicaid. not social security. and of course no one will tackle that.
Great post. So everyone essentially gets around 15 percent of their average annual income? What is someone never worked at all (or wroked very little) and thus, never "contributed" to the SS fund. Can he or she still claim benefits? As a "conservative", I must say that the idea of some sort of personal retirement account does sound attractive in theory. Is the money I pay in now tied to me in anyway at all? If not - can a middle approach exit? What if I was allowed to purchase T-bills with a portion of my SS contribution? I suppose the $$ would get to the general fund anyways right? I would just be guaranteed some sort of benefit (in the form of bond maturation) 30 or so years from now - and can transfer the bond(s) to my family if I croak. Of course, my SS benefits would be lowered accordingly.
MILITARY SPENDING. The US spends more than the next 10 or so largest militaries per year combined. It is ridiculous that military spending is never on the table.
Open an IRA. Max out every year. Max out your 401K/403B at work. Use all catchups when possible. Still not satiated? Buy a self directed variable annuity. And finally you can just do it the old fashion way via a brokerage account. Next question?
It used to be on the table (didn't Clinton cut Defense?) but I don't think that can happen for the foreseeable future. The Republicans have done this great job of painting Democrats as "weak". So I doubt either party would introduce spending cuts there.
Gee thanks. I was not aware that those things existed. I thought the discussion was about privatizing Social Security.
Part of this discussion appears to avoid mentioning that we are not desperate for retirement savings vehicles.
Very typical Neocon response...basing your opinion on misinformation. Please go back and re-read the very first sentence in the article I posted under the "How It Works" paragraph. Since I know you won't, let me quote it for you. SS is based upon how much you contributed. If you didn't contribute very much, you won't get very much. Despite efforts by right-wingers to paint it as a welfare program, SS is not about hand-outs. It is an entitlement program based upon what you contributed. By the way, it doesn't replace 15% of your income. It is meant to replace between 24% and 57%. That nugget is also in the article I posted.
