The scope and scale of the fraud… and the misconception that allows it to continue and worsen
So, once again, telling people the truth about Social Security produces indignation, and the expression of common misconceptions… to wit:
“Hey wait a second. I paid into Social Security for 47 years. I’m just getting out that I paid in, and the return on my investment. It’s not my fault congress didn’t do what it was supposed to, and raided the trust fund”.
Actually, no, you’re not. Not even close.
The first thing is, as noted in the pieces “The Greatest Fraud in the History of the Human Race“, and “It isn’t, wasn’t, aint ever gonna be…“; there is no investment, no insurance, no pension, no annuity, and no “trust fund”.
The payments to current retirees are entirely and exclusively paid out of the taxes of current productive workers. Nothing else.
Further, retirees actually get far more out than they put in.
As of 2010, the average retired worker received $1180 per month, or $14,160 per year. This is, in theory properly inflation adjusted etc… So can be dealt with in constant dollar terms.
In constant dollars, the average individual salary has almost doubled over the working life of the current retiree, from somewhere around $13,000 (constant dollars remember) in 1963 to around $25,000 in 2010.
The FICA tax rate is currently 12.4%, currently split equally between the worker, and the employer. Meaning that the average annual FICA contribution is currently about $3100, $1550 by the employer, $1550 by the employee
That’s about 1/5th the amount paid out to the average retiree…
If we assume a 47 year working life (actually, the average is 39 years for women who work, and 44 years for men who work, with a national average of 37 years – including non-workers – but we’ll be generous), that would, presuming constant wages in constant dollars, mean a total contribution of about $146,000.
Against an 11 year average retirement, that would be about $13,200 a year… Only the average is actually $14,160, a difference of about $1000, or about 7%.
However, because constant dollar wages have actually almost doubled over the life of the average retiree (meaning that their FICA taxes were much lower for much of their working life; particularly prior to 1984) and because the average working life is approximately 44 years, not 47 years (for men who work… we’ll exclude women, as they didn’t make up a major percentage of the full time workforce until the 1980s), the actual numbers are much worse…
In constant dollar terms, given inflation (particularly the inflation that occurred from 1968-1984), and the current average lifespan after taking retirement of 11 years; the average social security recipient actually receives 2.7 times in benefits as they paid in (this is the SSA’s estimate).
This is primarily the result of inflation, and dramatically increased lifespan. Unfortunately, as no actual return earning investments have been made, it takes the increasing contributions from new and more productive workers, to keep paying down the current payments.
This tells the tale:
Total benefits paid, by year
Year – Beneficiaries – Dollars
1937 – 53,236 – $1,278,000
1938 – 213,670 – $10,478,000
1939 – 174,839 – $13,896,000
1940 – 222,488 – $35,000,000
1950 – 3,477,243 – $961,000,000
1960 – 14,844,589 – $11,245,000,000
1970 – 26,228,629 – $31,863,000,000
1980 – 35,584,955 – $120,511,000,000
1990 – 39,832,125 – $247,796,000,000
1995 – 43,387,259 – $332,553,000,000
1996 – 43,736,836 – $347,088,000,000
1997 – 43,971,086 – $361,970,000,000
1998 – 44,245,731 – $374,990,000,000
1999 – 44,595,624 – $385,768,000,000
2000 – 45,414,794 – $407,644,000,000
2001 – 45,877,506 – $431,949,000,000
2002 – 46,444,317 – $453,746,000,000
2003 – 47,038,486 – $470,778,000,000
2004 – 47,687,693 – $493,263,000,000
2005 – 48,434,436 – $520,748,000,000
2006 – 49,122,624 – $546,238,000,000
2007 – 49,864,838 – $584,939,000,000
2008 – 50,898,244 – $615,344,000,000
You can see that:
from 1950 to 1960, beneficiaries increased by a factor of 4.5, payments increased by a factor of 12
from 1960 to 1970, beneficiaries doubled, payments tripled
from 1970 to 1980, beneficiaries only increased by 30%, while payments increased by 400%
from 1980 to 1990, beneficiaries only increased by 11% while payments more than doubled.
from 1990 to 2000, beneficiaries increased by about 11%, payments increased by about 50%
from 2000 to 2010, beneficiaries increased by about 11%, payments increased by about 50%
These are reflective of the huge jump in expected lifespan between 1950 and 1990, and the massive inflation from 1968 to 1984.
We are about to hit another inflection point however. Or rather, we already have, it’s just not reflected in the numbers yet. In the 2000s, beneficiary growth slowed down, because the 1940s were a relatively low birth rate period for the U.S.
In 2007, the baby boomers started hitting minimum retirement age of 62. In 2010, they started hitting 65. The peak of the baby boom was from 1946 to 1959, where we maintained, on average, more than double our previous normal population growth year over year. This is combined with an expected increase in lifespan over previous generational co-horts of 3-7 years; and an increase in real income of almost 30% to 50% over previous cohorts.
So, the REAL fun, is the 10 years from 2010 to 2020… when instead of the typical 1 million or so additional beneficiaries, and 30 billion additional dollars in payments per year, we are expecting 2.5 million additional beneficiaries, and over 100 billion additional dollars in payments per year.
Then from 2020 to 2025, the increased slow down, to just 1.75 million additional beneficiaries… but still over 100 billion additional payouts.
Basically, we’re looking at increasing the beneficiary population by about 50%, and about tripling the annual payments, in the next 12 years.
This is happening, just as the earners in peak earning years fall off precipitously. From 1964 to 1975 the birth rate dropped by 30%, and has pretty stayed there ever since.
By 2025, we’re looking something like 75 million beneficiaries, and 2 trillion a year in payouts; against probably 125 million productive workers (this is accounting for population growth, as well as retirement growth).
That’s $16,000 per year, per productive worker.
Presuming todays average salary per productive worker of appx $25k with a real dollar increase of 3% annualized (the average over the past 100 years) over 12 years, you get appx $37k.
It would require a 45% payroll tax rate to cover that… Which is about 4 times what it currently is.
That’s JUST for social security, never mind all other taxes… and that’s a fairly optimistic growth rate for both worker population, and worker wages.
… and its obviously completely impossible.
We literally cannot tax our way out of this… We’d have to increase taxes to 100% of income… and then expect to actually get it (which we won’t. We’ve never been able to extract more than 22% of gdp for more than a few years even in WW2, and never more than 19% average over any rolling 10 year period); and it isn’t going to fixed by “modest reform”.
We are going to have to cut social security dramatically AND raise taxes dramatically… there is literally no other possibility.
Oh… and it gets worse for the following 11 years… well, that’s based on todays average survival after retirement… it’s estimated that average goes up by 4 years over the same time period… before it starts to get any better… and it’s not for 15 years after that, that retirements actually slow below the rate of worker increase…
… and then another 15… or given increasing lifespans probably 20 years at that point… before wages actually increase at a rate higher than retirement payouts.
Oh and the “trust fund”? Yeah, even if it actually existed, it would only be about 2.7 trillion… which is only about 4 years payments at current levels, and 2 years payments at expected future levels. So, even if the “trust fund’ hadn’t ever been raided, we’d STILL be in this situation.
So… it’s 2013… We’re already below zero, and if we don’t do anything to fix it, we’re basically hosed until about 2070.
And it isn’t because “you’re getting your fair share of what you put in”… You’re actually getting 2-3 times what you put in.
Well… for now anyway…
We’ve already run out of money… The question now is, what happens when we run out of debt, and excuses.