Friday, October 5, 2012

CBO on SS – It’s a Terrible Deal for Most People

Both Mitt and Barack spoke about Social Security (SS) in their debate. For political reasons, they took the same approach. They indicated their continuing support for this busted program. They agreed that some “tweeks” might be necessary, but there would be no fundamental changes to America’s largest entitlement program.


I wish that one or the other of the candidates had spoken the truth about SS. The fact is it is a terrible program for the vast majority of workers who are forced to contribute to it in order to keep this dog alive.


Fortunately, the Congressional Budget Office has provided the information necessary to look at SS and evaluate how various income groups will fare over their lifetimes. The bottom line is as ugly as it can get. The fact is that SS is stiffing 80% of American workers.


The key statement from the CBO report (link):


For people born in the 1940s or later who have household earnings in the second quintile or above, the present value of taxes will be, on average, more than the present value of scheduled benefits.


Got that lovers of SS? 80% of the people who contribute to SS get less than what they paid in. Only the bottom 20% of income earners have a chance of breaking even.


The CBO provided a chart that describes the consequences to various income groups. I found the CBO presentation a bit confusing and also misleading. The following is the original chart from the CBO, after that is my stripped down version.



My version of the CBO chart:


I) – My chart eliminates all of the information marked “Scheduled Payments” (SP). This term refers to a theoretical number that an individual is accruing according to a schedule at SS. But that number is not going to be paid to a substantial number of workers. The law says so. From the CBO report:


Taxes are projected to be insufficient to pay for scheduled benefits


If you’re under 55, nix to any thoughts you might have on that statement from SS about your SP. All that information in dark blue is just smoke. (I don’t think they even send SPs anymore)


II) I eliminated the info for those born after 1940. It’s not significant.


My revised chart allows most people working in America today to evaluate what his or her results from SS will be. Consider the following when trying to find where you fit in:


-The data is a ratio of the NPV of contributions one will make versus the NPV of the benefits one will receive. 100 is breakeven. If you are below the 100 line, your a loser.


-The results are presented in vertical bars. The bars represent a range of outcomes. The key variables are how long you worked, and how long you will get benefits before you die. It is 80% certain that you fit into this range of outcomes. If your not sure about those variables, assume you are at the midpoint of the appropriate range.


-No information is provided for the second and fourth quintile of income earners. The language the CBO uses (above) confirms that the second quartile also suffers from negative net returns from SS. Those in the fourth quartile are deeply in the red.


-The following is the information on annual income by quintile. The first line is the CBO numbers from 2009, the second line is my updated numbers for today (I think I’m pretty close with these estimates)



Did you find yourself in this chart? Are you surprised by the results? My conclusions:


If you are on the bottom of the income scale today, and you expect to remain at the bottom for the rest of your working life, then you will be happy with the results that SS will deliver to you. Only a small portion of those in the lowest income bracket will face a negative return on their SS contributions. If you are on the bottom rung, you can expect, on average, to get about $1.25 back for every dollar you (and your employer) have kicked into the rat hole of SS.


If you are not now at the bottom, and/or you don’t expect to be in that position for the rest of your working life, then SS is a very bad deal for you. Fully 80% of all workers will see a negative return on the money they are forced to put into SS.


I don’t get it. Both political parties want to keep SS as it is, or raise taxes further to “strengthen” it. I believe that if there were a poll of workers asking if they were pro or con on SS, the results would conclude that a majority wants the program to continue. But 80% are getting screwed.


12.4% of an individual’s compensation goes out the door to SS. If this burden were eliminated, the economy would thrive. Unemployment would drop as the extra take-home pay works its way through the economy. As the economy expands, tax receipts would rise.


Alas, there is no possibility to eliminate SS. The committed costs for the next 20 years are impossible to reverse at this point. This beast can’t be killed any longer.


There might be an alternative; an opt-out for younger workers. If there were an opt-out, I think that many workers would accept the deal. If there were a lot of folks who did not want to “pay to lose” with SS it would result in a huge hole. That hole would have to be filled. Some payroll tax would have to be applied to those who opt out. I have not seen any numbers on this approach (Hello – JCT), I estimate that a 2% tax on opt-outs would be required to keep SS afloat.


I’m curious what people think about an opt-out. If you respond, keep in mind that most of you are getting about 50 cents on the dollar for what you are now putting in. My question:


If you opt-out, you will get a net 10% pay raise for the rest of your life. Your income will go up by 12.2%, but you will get hit with a 2% tax that goes out the door. You will not get SS benefits when you retire.


If there were an opt-out, there would be consequences:


*The size of the government’s role in society and the economy would decline over time.


*The opt-out would result in a near-term stimulus for the economy as forced savings is converted into take-home pay and consumption.


*As SS has a source of revenue and no long-term liability (the 2% tax/no future benefits) the actuarial solvency of SS would remain about the same.


*Opt-outers would have to be much more diligent about their savings and planning for retirement.


The risk of an opt-out is that 25-30 years from now those who did opt-out end up with no savings and become a burden to society. Depending on the numbers, this could be a real problem. I say “could” as it is impossible to predict what will happen.


I can, however, say with certainty that the existing SS “plan” insures that there will be a major crisis with SS and the economy in less than twenty-years. That outcome is written in stone. It would be worth our while to consider the alternatives. I doubt we will be given a chance for any real alternatives from either Mitt or Barack. Their plans guarantee that we will hit an iceberg.



  1. But What Do I Know? says:

    Did they adjust for the fact that some of the FICA tax goes to disability and survivor’s insurance? In other words, a portion of the payment is for insurance and not retirement. If you factor that in OASDI may not be such a bad deal. . .

  2. I loved as much as you’ll receive carried out right here. The sketch is attractive, your authored subject matter stylish. nonetheless, you command get got an impatience over that you wish be delivering the following. unwell unquestionably come more formerly again as exactly the same nearly very often inside case you shield this hike.

  3. First of all, “your” is a possessive pronoun. It does not mean “you are”. The contraction of “you are” is “you’re”.

    Second of all, if you think that companies are going to pay their employees the 6.2% payroll tax they are giving to the tax man if SS went away, you’re [not “your”] insane. So all that stuff you wrote about the stimulus of ending SS, and higher pay for workers, is just hogwash.

    • Thanks for the spelling edits.
      Do you think that the 6.2% your employer contributes on your behalf is not yours? If it is not yours, whose is it?

    • First of all, Bruce Krasting rocks. Well presented article, as usual.

      Second, when you say, “First of all…” it’s unneccesary and incorrect to say, “Second of all.” “Second” will suffice. Common error.

      I believe Mr. K knows the difference between a possessive pronoun and a contraction. Homonyms are tricky. They bite even the best of writers from time to time.

      • “Your” errors remain, Bruce.

        There’s a domino effect. You can be sure that most opt-outs would get to retirement age IN DEBT, not ready for retirement. Much as it is currently. Labor camps or gassing would have to be passed into law to deal with them, and that should be done concurrent with an opt-out option so it’s fully on the table what the consequences of that cell phone data plan and bi-weekly UFC pay-per-view are.

        No team, no company, no gang, no union, no pack of animals, and no society can survive if the lazy are coddled. Time to cull the herd.

  4. Why should opt-outs have to pay a 2% tax to help support a program for other people? And, yes, they WERE asked if the wished to continue with SS ~ they OPTED OUT.

    • Because there would be a giant hole.

      I do not want to destroy a safety net. I want the safety net to be available and financially viable. To keep it solvent for those who need it, the opt outers would have to kick in something like 2% (versus 12.2).

  5. Hi!, Patrons Of Bruce Krasting Et Al:
    Why let all the good news slide on by without acknowledging it regards SS? The US $ is headed towards worthlessness & so it would appear that the 1st item up for review would be how do you get paid anything with a worthless currency? At that point the Socialists’ dreams will all come true, as they can then confiscate whatever they want by nationalizing everything. They can dispense with the stock markets; stifle every investment, kill every commission trade, eliminate banks and credit unions, end international trade, eliminate the trade and credit deficits, eliminate all profit margins, destroy every marriage/family, depopulate the world by around 80% and set-up their world government under universal martial laws for the remaining 20% of the serfs? Which side of the New World Order will your role in life be played?

    RUSS SMITH, CALIFORNIA (One Of OUR Broke States)

  6. Bruce, The statistical skew you point out is the nature and intention of a social safety net. Treating Social Security as some kind of mutual retirement plan for one and all is the primary source of the problem since it creates this great big vote-buying cookie jar. How about changing the name to Welfare for the Aged and Disabled, cutting the FICA contribution rate dramatically and going to extreme means testing to get something workable that supports just truly low or zero income retirees? The reality will always be that we won’t let our elderly die homeless and starving. Supporting the elderly poor requires taking from someone else. What is bothersome is bankrupting my kids in order to provide a nice little monthly check to every retiree regardless of how much dough they have in the bank. Of course, they all can vote and my kids can’t; pretty easy electoral math there. I do thank you for breaking everything down and pointing out the unsustainable financial math. Unfortunately, governments tend to address things once they hit a crisis point rather than anticipating that point and trying to avert the crisis.

    • Great idea, but means testing would need to be retoractive (or ongoing through life).

      Someone’s poor now because they lived the high-life and want me to foot their bill ‘cuz I have money left over after saving, or I invested my money into my success instead of cable television and take-out every other night? Too F***ING BAD !!! Allow suicide, and I’ll pay for that.

  7. As one of the people who could fall into the “opt-out” category, I have been advocating this for years (and even the much more drastic step of elimination of SS altogether). People fail to realize that SS (and the SS/Medicare combo) are bankrupting this country, with SS spending being bigger than our whole department of defense spending budget, before you even throw Medicare into the mix.

    Those that say Defense spending can be lower have a point, as there is tons of waste in the DOD budget as well, but this country has always had a “Defense Department” of some sort since we had to fight for our freedom.

    Regardless, I think the SS/Medicare combo is indicative of both a status quo problem that no one wants to fix, and the willful ignorance of our politicians that the elderly are bankrupting this country. If you want to solve the budget’s problems, all you really need to do is eliminate just SS. Eliminating both would be even better – we’d be in the black again. Certainly, if I get to the point in my life that I am a massive economic drag on the rest of the economy, I would simply tell the people to put a bullet in my head and end me. Which, if you put on the opt-out sheet, I will easily sign – who would want to be THE drag on the country’s economy? Apparently, our politicians don’t see it that way.

    Though my proposal is more drastic than yours, it would solve the country’s long and short term fiscal woes immediately. If I could, I would offer the same deal to people my age that SS does. Of course no one would take it. I fail to understand how anyone under the age of 40 willingly votes for any politician who does NOT want to completely dismantle SS.

    • The thing that I don’t understand in the CBO chart on lifetime benefit to tax ratios is that it indicates that there are higher ratios for later cohorts than earlier cohorts. For example, 2000’s is better than the 1960’s in all quintiles. This does not make sense. Any explanation on how they get this result?

  8. very good comment

  9. Hi Bruce, Actually, we already have an partial opt out, for those 5% of earners that make more than $110,100/year. Only the first $110k of one’s salary is subject to the ss tax.

    I have no idea what the average wage is, for that group of earners that make more than $110k per year. As a talking point, for simplicity of math, let’s say it is $220k per year. Then, if this is close to reality, then the the top 5% of wage earners pay at a RATE (% of income) exactly one half that of everyone else. It would hard to design a more regressive program, even if that is what you set out to do.

    If this is a retirement program, then the regressive nature of the tax collection regimen isn’t all that big of a deal. Probably fair. But if you’r now saying it is a welfare plan, then any fix has the address the regressive nature of tax table for it.

    So, for this reason, and other reasons discussed on other ‘Bruce K.’ threads, it is apparent that this cannot be fixed within the current political framework. It will be dealt with around the same time as the USA defaults on Treasury Bond obligations, I believe.

    • If the top 5% pay at a RATE half of everyone else, what about the other side? As a RATE, what is the replacement income they get compared to their salary when they retired? Yeah, less than 50%. Much less. Is that fair?

  10. Entitlements will whither and die eventually, once the current monetary system is revamped to a pre-1971 style gold standard. Commerce will demand currency reform with their wallets once confidence begins to wane in money in its current form. Otherwise, commerce designs its own and the bureaucratic skimmers and rent-seekers won’t stand for less transparent monetary transactions as they would be aced out of tracking and taxing all of it. So, the system will have to appease commerce and give it a sound currency to keep it from going underground.
    The risk of future retirees who would opt out, of having nothing in 20-years is a moot point. This will apply to all who fail to make provisions as this program is a dead man walking. Independence from government and being prepared was once a hallmark of the US. Time to grow up, kiddies.

  11. All pyramid schemes are bad for most people — except the lucky few who got in at the beginning. Everyone else loses eventually. State sponsored pyramid schemes are no different

    That is why the politicians and bureaucrats insisted on not being included in Social Security or Medicare — they have their own system (paid for by taxpayers of course).

    If social security was a good deal, Congress would be in it. They are not, and never were.

  12. Good Post! Thank you.
    But why space each comment so far apart? I’m 82 and have trouble reading from the computer screen. I prefer to print good articles like this for later reading and future reference. Too many pages require more paper and printer ink. Too many newsletter writers fail to economize paper and ink.
    I’m one of the victims of our good ole SS system and must hold costs in check.

  13. I am 66 years old and looking at my SS statement. I paid in $111,215. My benefit is $2390 a month. Therefore the “breakeven” for me is only 46 months. That is a great deal!

    If I add in my employer’s contribution to SS (which is more than mine!) the breakeven is 105 months (9 years) Still a pretty good deal.

    All the money received after 46 months (or 105 months) is profit. If I live an average life of 82 years I will have a NET return over my investment of greater than 200% or a return of 82% if look at the combined employer and employee investment.

    Now I understrand that this does not take into account the time value of money both on the accumulation side and on the payout side. However it also does not take into account that I have had no investment risk for the funds. It only takes one or two down years near the end to wipe out the accumulated return.

    Most Americans are very poor investment managers. Just look at 401(k) total returns…… So a floor program that folks cannot outlive it is really ok.

    So for a “risk free” investment over my working career I could have done a lot worse…..

    • @Howard — you don’t get it.

      You didn’t “pay into” anything. There is no fund, you paid taxes to Congress, and they allocated benefits that you may or may not end up receiving. They are already scaling back what they (Congress, not taxpayers) “promised”, and they already require you to use some of your benefits to pay overpriced Medicare premiums (which will increase, even when ObamaCare gets repealed).

      And an 82% “return” over an average of 20 years (half a career, assuming you worked 25-65? Try doing a little math before you write a dumb comment. That is a 3% return per annum, which for you senile folks is a bit less than the 3.2% average CPI over the same period. For those of you that had trouble with public school “math” classes, 3% return is less than the 3.2% cost of living change. You **LOST** money, even if you make the bogus assumption that your benefits won’t be cut going forward.

      If you had contributed the same amount into a money market fund instead of the SS ponzi scheme, you would have had a better return — at least it would have kept up with inflation. Even a short term bond fund would have blown the doors off your so-called return.

      Baby boomers never funded their retirements. You spent like drunken sailors and racked up $17 trillion in so called “debt” — which you aren’t even pretending like you will pay back.

      Subtract the $17 trillion you owe from your retirement accounts to pay back debts incurred under your generation’s watch. Since you also ran dozens of world class companies into the ground — GM, Bethlehem Steel, the money center banks, etc — and you didn’t build any new industries in their place, we should subtract the replacement value for that debt too.

      Then lets look at the **NET RETURN** of your spend-thrift generation. That is what you have to live your retirement on, not the pretend government accounting you quote (which as mentioned didn’t even match inflation).

      After paying off your debts, you baby boomer deadbeats lost money every single year of your lives. No something to be proud of Howard

    • Hi Howard, I doubt that the purchasing power of your checks will be very good, 4 years from now.

      And, at age 66 and apparently healthy, you are a slam dunk to outlive this program. You have heard of the ‘fiscal cliff’ at the end of this year, no doubt. That is a tiny, gradual slope, compared to the real fiscal cliff, which is the social security financial position in about 6 or 7 years from now, perhaps sooner. There just isn’t enough money coming in to pay all of the benefit checks going out.

      They probably should have set up real trust fund, with a lock on it, lol. It was just too tempting for Congress to spend the excess funds that poured in all those years.

    • Howard,
      Your “return” is the slavery of your kids and grandkids, who get nothing. The money you “invested” was spent. Every penny is gone. Your kids and grandkids can’t afford to pay your retirement, let alone put away anything for their own retirement. Which means the money will be printed, since your class coupled with the welfare leeches has the votes. But there is justice, as the printed money will drive up prices. And this will bankrupt the leeches.

  14. Daniel Patrick Moynihan, followed by Dubya, had it right. I would have gladly opted out (as a middle income earner) over twenty years ago given the chance. Now, at the end of my working life, I’m not real happy with the outcome both parties have delivered to the people. Why doesn’t somebody do something to return sanity to this program?

  15. Great post!!

    I think an opt-out is risky, given how much I see even well-educated friends underfund their retirements. Personal choice, yes, but when their choices have political consequences, it’s not a very sustainable solution.

    A better solution? Mandatory contributions, but you get to make allocations to a variety of investment choices. At the end, it becomes a defined contribution plan rather than a defined benefit plan. Mandatory contributions and fees could be linked to income, age and offsetting contributions to 401(k)s, and other retirement savings vehicles (to keep the progressive nature intact). Maybe provisions to ensure companies move the 6.2% payroll contribution into 401(k) matches rather than usurping it. Expansion of tax provisions encouraging SEPs and increasing IRA contribution limits.

  16. I would opt out in a second. I have paid in for 20+ years and I still would not hesitate regardless of whether I were in the put or take column (for the record, I think I am a put based on your analysis). My opt out is based on wanting to kill the beast and not wanting to participate in the Ponzi. I am not worried about my wife and me (we actually save money), rather I am worried for my kids. Someday this beast must die, and I would willingly participate in killing this beast even if it came at my expense.

  17. Bruce,

    I usually like your stuff, but I don’t get this one. Maybe I’m missing something, but isn’t it obvious that for a pay-as-you-go system like Social Security, which also has a disability insurance program embedded, there is no way for the average person to come out ahead? I have been on the “con” side of Social Security debates with many educated people, and they all understand and accept this concept. Their argument is that getting 80 cents on the dollar for your first 13% of income (for the average person) is a fair price to pay for the social stability that Social Security and its disability program brings. I also find that to be a fairly compelling argument, I just think we need to make the inter-generational math more fair. The tax rate should have been higher in the past, but since it’s impossible to go back in time the benefit for current recipients should be reduced. Current recipients are getting more than their fair share. Of course, old people vote, so that will never happen.


    • @Daniel — there is no way to make a ponzi scheme “fair”. All ponzi schemes benefit the early members and screw over the later members.

      The baby boomers will not get the same deal as the first SS generation — the money simply is not there, and trying to raise taxes on an un/under-employed youth generation is both unfair and likely to cause 10x the social unrest. The baby boomers’ voting block is irrelevant. Even if the majority of voters decide in favor of keeping social security/medicare, the money simply is not there.

      And for the “third” generation to enter the ponzi scheme (aka generations X,Y, Millenials) — Social security is pure age discrimination. If anyone proposed taxing all persons above age 50 an extra 14% on their income — what would the AARP say? And yet the same AARP supports an extra 14% tax on everyone under age 50. Hypocrites and cowards.

      Either the boomer generation will “voluntarily” accept immediate cuts (I agree this is unlikely) — or later in their lives they will face the public housing / project equivalent of SS/medicare. Most of them are too selfish and short sighted to see this inevitability coming — but the only way to avoid it would be massive cuts in the near term.

      The politicians will just keep kicking the can down the road in hopes some other crook is in office when the ^)*&*( hits the fan. They have a pension scam for themselves (not social security) that pays them for life, even if they only serve one term (actually even if they are convicted of a crime and forced out early. They also get taxpayer paid health benefits far in excess of ObamaCare.

      People like to talk about incentives — the politicians have zero incentive to save the voters from the Social Security/Medicare train wreck. Either the baby boomers pull their collective heads out of their @sses (unlikely) or this gets much much worse.

      At least Bruce is trying to raise awareness, but I suspect most boomers are too selfish and short sighted.

  18. problem number 1 I see all kinds of waste and complacency ..he with the golden tongue wins…divide and conquer..class warfare is the game of the day…interesting how the political office candidates are able to spend millions and millions on getting their word out while a big percentage of the real workers in the population are scratching for a few dollars for basics..
    shameful direction this country has taken when success and intelligence is a bad thing

  19. Given the greed of the government, a refund of any kind would never happen. And remember, most socialist don’t think the part contributed by your employer was your money either.

    For me, at a minimum, I should be refunded the my and the employer’s portion over the years (plus interest). I could at least pay off my home.

    • Justice demands that you be repaid what was stolen from you at the point of a gun. Agreed. However, that money is long gone. Justice also demands that you can’t now point the gun at others and steal their wealth, either through government tax, or money printing. Basically you and I are screwed. The best we can hope for is to have some of our tax deposited in our OWN private accounts invested in PRODUCTIVE assets. Won’t happen. Basically we face total wipe out.

  20. Any solution to this mess MUST involve pain on all sides. To the Gen X and younger, they will be told that SS is ending for them, but they will still pay a tax. However, some of it will be theirs kept in a Chilean style system, that they OWN even their estate after they die. The rest goes to the bankrupt baby boomers. The baby boomers will be means tested, and if that is not enough, then there will be more cuts. It’s called doing a budget like adults. Why should Gen X and younger pay for these bankrupt people who destroyed the productive potential of this great country? Because we don’t let Granny starve. She might be eating rice and beans, but Americans don’t let their own starve when the government screwed this up. So you scale out of SS and migrate to a Chilean system. THIS WILL NEVER HAPPEN. So we are in QEinfinity, which means inflation, misallocation, and a general rise in price levels.